Question 12Q - Intermediate Accounting (Kieso)

Question

What are closing entries and why are they necessary?

Step-by-Step Solution

Answer

Closing entries are the journal entries prepared at the end of a financial period to carry forward balances from a temporary account to a permanent one. The objective of the closing entry is to initialize the temporary account balances to zero, all set to commence another financial period.

Meaning of Closing Entry

Closing entries are prepared to shift the nominal account balances to capital, that is, retained earnings, after taking into account adjusting entries and preparing the financial statements. 

Importance of closing entries

The motive for preparing closing entries is as follows:

• Closing entries are essential because it helps the firm to evaluate the piled-up income of an accounting period and check the accuracy of the data figures present on the adjusted trial balance. 

• It also helps us to ascertain the net income of the present accounting period.