Understanding Closing Entries
At the end of an accounting period, the bookkeeping firm in Singapore will make some closing entries when they are closing the books of accounts of a company. In accounting, closing entries are the entries that the accountant would make when an accounting period has come to an end. The purpose of creating these entries (Also see Understanding Correcting Entries) is to nullify the balances of the company’s temporary accounts and transfer those balances into relevant permanent accounts, respectively.
Some examples of temporary accounts include revenue account, expense account, withdrawal account and dividends account. In other words, closing entries serve to transfer the balances from these accounts to the permanent ledger accounts. By doing to, the balances of temporary accounts will turn into zero, and the accountants can use them in the following period. At the same time, the balance sheet accounts will receive those balances. Some people may call this process as “closing the books”.
Business owners determine how frequently he wants to close the books based on the size of his business. Most medium and large corporations would choose to close the books monthly so that they can generate their monthly financial statements and analyse the company’s performance. On the other hand, small companies may choose to have the closing of books, whether quarterly, semi-annually or annually.
An accountant needs to take a series of steps to close the books. Firstly, to close the revenue and expense accounts, he should move their balances of the entire period to the income summary account. Then, he should close the income summary account by transferring the amount of net income generated or net loss suffered to the company’s balance sheet (Also see Components in Balance Sheet) under the retained earnings account. If the company has paid out any dividend, the accountant needs to move the balance recorded in that account to the retained earnings (Also see Understanding Definition of Retained Earnings) account too.
Closing entries play a crucial role in helping the business owners to understand the financial position of their businesses. They will not be able to compare the sales between different periods they have made if they do not close their revenue accounts at the end of every accounting period as the amount of sales will sum up. Also, they are unable to compare the expenses they have incurred without closing the expense accounts. Closing entries serve to nullify the temporary accounts so that the revenue or expense accounts do not contain any figure brought forward from the last accounting period.
In an accounting (Also see The Role of Trial Balance in Accounting) cycle, creating closing entries is among the last steps an accountant should take. As we mentioned above, you can choose the frequency of closing your books. No matter how often you want to do so, note that the frequency should be consistent.