Opening and closing entries

Opening and closing entries: An opening entry is the first entry used to record transactions that occur at the beginning of a company. The original investment for the business, as well as any early debts incurred and assets acquired, are often included in the inaugural entry.

When the new financial year starts, the accountant makes one journal entry in which he reveals all of the assets’ opening balances and all of the liabilities’ opening balances, including capital. The diary entry is thus referred to as an opening journal entry. Because all assets have a negative balance, they are debited in a starting journal entry, whereas all liabilities have a positive balance, they are credited. Hence, Opening and closing entries both are important

If all assets exceed all obligations, the excess is the capital value, which is shown on the credit side of the initial journal entry. If, on the other hand, obligations exceed the value of all assets, the excess will be goodwill, which will be debited in the initial journal entry.

Date                                        Particulars                             Amount                   Amount

Assets A/c                       Dr.      XX

Liabilities A/c                                                           XX

The difference between assets and liabilities is usually positive, and the excess value of assets is represented as capital on the journal entry’s credit. Figures for opening balances may be found by looking at the prior year’s balance sheet.

Entries are being closed.

Opening and closing entries: A closure entry is a journal entry that transfers balances from a temporary account to a permanent account at the conclusion of an accounting period.

Companies utilise closure entries to zero down temporary account balances that display balances over a single accounting period. The corporation places these sums into permanent accounts on the balance sheet as a result of this action. These long-term accounts demonstrate a company’s financials throughout time.

Temporary accounts may be closed either directly to the retained profits account or via an intermediary account known as the income summary account. The retained earnings account is then linked to the income summary account. Both approaches have benefits.

Accounting firms may follow an audit trail by closing all temporary accounts to the income summary account. After all temporary accounts have been closed, the amount of the income summary account should match the net income for the time.

Because it saves a step, closing all temporary accounts to the retained profits account is quicker than utilising the income summary account technique. There’s no need to link temporary accounts to another temporary account (income summary account) before closing it.

Both concluding entries are appropriate and provide the same effect. Eventually, all temporary accounts are converted to retained profits and reported on the balance sheet.

Opening and closing entries

An example of a concluding statement

Opening and closing entries: The closing entries in the income statement that zero the temporary accounts and transfer the funds to the permanent retained profits account are shown below. The income summary account is used for this.

1. Close Revenue Accounts

Clear the balance of the revenue account by debiting revenue and crediting income summary.

2. Close Expense Accounts

Clear the balance of the expense accounts by debiting income summary and crediting the corresponding expenses.

3. Close Income Summary

Close the income summary account by debiting income summary and crediting retained earnings.

4. Close Dividends

Close the dividends account by debiting retained earnings and crediting dividends.