CLOSING ENTRY Meaning and
Definition
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A closing entry refers to a journal entry made at the end of an accounting period to transfer the balances of temporary accounts to the retained earnings or owner's equity account. It is a crucial step in the accounting cycle as it helps reset the temporary accounts to zero, closing them out and preparing the books for the next accounting period.
Temporary accounts are those that accumulate revenue, expenses, gains, and losses during the accounting period, including sales, cost of goods sold, salaries, rent, interest income, and advertising expenses. By closing these accounts, their balances are added or subtracted from the retained earnings or owner's equity account, capturing the net income or loss for the period.
The closing entry process typically involves four steps: 1) closing revenue accounts by debiting each revenue account and crediting the retained earnings account, 2) closing expense accounts by debiting the retained earnings account and crediting each expense account, 3) closing the income summary account by transferring its balance to the retained earnings account, and 4) closing the dividends account by transferring its balance to the retained earnings account.
The purpose of closing entries is to ensure that the income statement accounts reflect only the activity of the current period and to reset the temporary accounts to zero for the next accounting period. It enables accurate financial reporting by segregating different periods and maintaining the integrity of the income statement and retained earnings.
Common Misspellings for CLOSING ENTRY
- xlosing entry
- vlosing entry
- flosing entry
- dlosing entry
- ckosing entry
- cposing entry
- coosing entry
- clising entry
- clksing entry
- cllsing entry
- clpsing entry
- cl0sing entry
- cl9sing entry
- cloaing entry
- clozing entry
- cloxing entry
- cloding entry
- cloeing entry
- clowing entry
- closung entry
Etymology of CLOSING ENTRY
The term "closing entry" in accounting has its etymology rooted in the concept of closing or completing the accounting cycle at the end of an accounting period. The word "closing" comes from the verb "to close", which means to bring to an end or complete. In this context, "closing entry" refers to the final entry made in the accounting records to summarize and close out temporary accounts, such as revenue and expense accounts, and transfer their balances to permanent accounts, most commonly the retained earnings account. The purpose of this entry is to reset the balances of temporary accounts to zero in preparation for the start of a new accounting period.
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