The closing process in the accounting cycle happens after the completion of the financial statements. According to Matsumura et al. (2018), the accounting cycle ends when event information and all transactions get captured, after which they pass through the final process for the production of meaningful financial statements. In this view, closing entries help in updating retained earnings and resetting temporary accounts for another accounting period. The process typically serves to transfer certain temporary accounts like expense, revenue, and dividend accounts to permanent ones (Hasanah et al., 2022). During the four-step process, accountants close revenue and expense accounts to an income summary, while closing dividend and income summary accounts to retained earnings (Matsumura et al., 2018). In the first step, a debit entry is done for the given revenue accounts, which is then transferred to an income summary account. After debiting the revenue accounts, all expense accounts are credited, returning the entries to zero. Subsequently, the income summary is debited through a journal entry and then credited to the retained earnings account. However, the process ends after closing the dividend account to retained earnings; this is achieved by crediting and debiting the dividend and retained earnings account, respectively. Therefore, the closing process relies heavily on the right identification of financial accounts.
The classification of accounts into temporary and permanent ones is vital in preventing a mix-up of balances with those of the next financial period. Matsumura et al. (2018) concede that temporary accounts typically carry out balances and accumulate dividends, income, and revenue. When this is achieved, the balances are moved to permanent accounts that indicate the business’ long-standing financials. Thus, income statements get constructed from temporary accounts’ balances once the fiscal year comes to an end (Matsumura et al., 2018). The income summary aggregates income accounts at the end of every accounting period. On the other hand, the expenses and revenues account balances close to the retained earnings account. In summary, the closing process helps account for a company’s finances for accuracy, accountability, and conformity.
References
Hasanah, U., Rasyiqah, S. Z., Mawaddah, W., & Muda, I. (2022). The Steps in the accounting cycle and how to prepare correcting entries. Journal of Positive School Psychology, 6(3), 2388-2394.
Matsumura, E. M., Mattison, B. L., & Miller-Nobles, T. L. (2018). Horngren’s Financial and Managerial Accounting, The Financial Chapters. Pearson.