Q5-19RQ - Horngren'S Financial And Managerial Accounting

Question

What are the four steps involved in the closing process for a merchandising company?

Step-by-Step Solution

Answer

The closing process for a merchandising company includes the following four steps:

1. Closing of revenue accounts,
2. Closing of expenses accounts,
3. Closing of income summary, and 
4. Closing of dividend balances.

Meaning of Closing Entries

In accounting, closing entries refer to the closing of all the temporary accounts at the end of an accounting period. Under this process, journal entries are passed to close the revenues and expenses accounts and posted to the income summary account.

Steps included in the closing process

• The revenue accounts containing credit balances are closed in the closing process.
• In addition, the contra-revenue accounts and expense accounts containing debit balances are also closed.
• The income summary is closed, and the balances are posted into retained earnings.
• In the end, the retained earnings are adjusted with the debit balances of the dividends.