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Purpose of Closing The Books of Accounts

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Allyssa Pagas
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8 views1 page

Purpose of Closing The Books of Accounts

Uploaded by

Allyssa Pagas
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Purpose of Closing the Books of Accounts Only the ff adjusting entries will be reverse:

This is crucial for businesses to assess their financial well-being and  Accrued or unpaid expenses
closing the books is a way to ensure that financial statements accurately reflect  Accrued or uncollected expenses
the actual income and expenses of each reporting period.  Unearned income under the income method
 Prepaid expenses under the expense method
In closing the books, it is necessary to distinguish between temporary and
permanent accounts. Income statement accounts and owner’s drawings are Reversing Entry for Accrued Income
temporary account or nominal accounts. All statement of financial position
Accrued income for the present accounting period is usually collected in
accounts are referred to as permanent or real accounts. Temporary accounts
the next accounting period. If no reversing entry is made, this accrued income will
relate only to a given accounting period and are closed at the end of each
receive in the future must necessarily be credited to the accrued income account.
accounting period. Permanent accounts are not closed and their balances are
However, if there is a reversing entry all income collected in the future, whether
carried forward into next accounting period.
accrued or not can be uniformly credited to the income account.
Closing Entries are entries to the that transfer the balances of one account to
another account, resulting in a zero balance to the account that is closed.
Reversing Entry for Accrued Expenses
The procedures in closing the nominal accounts include the ff steps:
Accrued expenses of the current accounting period are usually paid in the
S1 - Debit each revenue account for the amount of its balance and credit income
next accounting period. If the adjusting entries for accrued expenses are not
summary for total revenue.
reversed, the payment of accrued expenses in the next accounting period must
S2 - Debit income summary for total expenses and credit each expense account necessarily be debated to a payable or accrued expense account. However, if
for its balance. there are reversing entries for these items all expenses paid in the future with
their accrued or not, can be consistently debited to the expense account.
S3 - Debit income summary and credit owner’s capital for the amount of net
profit. if the business has a net loss, debit owner’s capital for the amount of net
loss and credit and income summary.

S4 - Debit owner’s capital for the balance in his drawings account, and credit
owners drawings for the same amount.

Nature of Reversing Entries

A reversing entry is a general journal entry made on the first day of the next
accounting period. It is the exact reverse of an adjusting entry made at the end of
the previous accounting period. However, the preparation of reversing entries is
an optional bookkeeping procedure in the accounting cycle the purpose of
reversing is to simplify the recording of a subsequent transaction related to an
adjusting entry.

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