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College Accounting (Book Only): A ...

13th Edition
Scott + 1 other
ISBN: 9781337280570

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BuyFindarrow_forward

College Accounting (Book Only): A ...

13th Edition
Scott + 1 other
ISBN: 9781337280570
Textbook Problem

Your uncle owns a small sole proprietorship. He does his own bookkeeping, although he didn’t finish the chapter on closing entries before he opened his business. He mentions to you that closing entries look like they take a long time. He wonders why he should bother to do them because all he really looks at is the checkbook. What would you say to convince him that closing entries are necessary?

To determine

Explain the necessity of closing entries.

Explanation

Closing entries: The journal entries prepared to close the temporary accounts to capital account are referred to as closing entries. The revenue, expense, and drawing accounts are referred to as temporary accounts because the information and figures in these accounts is held temporarily and consequently transferred to permanent account at the end of accounting year.

Necessity of closing entries:

  • The accounts which are not closed at the end of fiscal period, but the balances are retained and carried forward to next fiscal period are referred to as real accounts or permanent accounts. All assets, liabilities, and capital accounts are real accounts.
  • The accounts whose balance is zero at the beginning of the fiscal period and the balance in these accounts is transferred to permanent account, are referred to as nominal accounts or temporary accounts...

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