Which Accounts are Closed at Year End?
At the end of a company's fiscal year, all temporary accounts should be closed. Temporary accounts accumulate balances for a single fiscal year and are then emptied. Conversely, permanent accounts accumulate balances on an ongoing basis through many fiscal years, and so are not closed at the end of the fiscal year.
At the end of the fiscal year, closing entries are used to shift the entire balance in every temporary account into retained earnings, which is a permanent account. The net amount of the balances shifted constitutes the gain or loss that the company earned during the period.
Once the year-end processing has been completed, all of the temporary accounts have been emptied and therefore "closed" for the current fiscal year. A flag in the accounting software is then set to close down the old fiscal year, which means that no one can enter transactions during that time period. Another flag can be set to open the next fiscal year, at which point the same temporary accounts are opened, now with zero balances, and are used to begin accumulating transactional information for the next fiscal year.
Thus, the only accounts closed at year end are temporary accounts. Permanent accounts remain open at all times.
Types of Temporary Accounts
The most common types of temporary accounts are for revenue, expenses, gains, and losses - essentially any account that appears in the income statement. In addition, the income summary account, which is an account used to summarize temporary account balances before shifting the net balance elsewhere, is also a temporary account. Examples of temporary accounts are revenue, cost of goods sold, rent expense, utilities expense, compensation expense, and benefits expense.
Types of Permanent Accounts
Permanent accounts are those that appear on the balance sheet, such as asset, liability, and equity accounts. Examples of permanent accounts are cash, marketable securities, accounts receivable, fixed assets, accounts payable, and common stock.
From the course: Financial Accounting Part 1 Video is locked. “ - Once an income statement is prepared, how do the revenue and expense numbers in the accounts revert back to zero
so that the company's financial performance for the next period can be measured? Through a process involving closing entries, the income statement numbers are set at zero and the balances in those accounts are transferred to their permanent home, the retained earnings account. The dividends account is closed to retained earnings as well. Thus, the retained earnings account reflects the earnings that have been retained, net income less dividends, in the business. This closing process reflects the
fact that revenue, expense, and dividend accounts are simply subcategories of retained earnings. The revenue, expense, and dividend accounts are used to temporarily keep separate track of the many business events that impact retained earnings during the year. At the end of the year, the balances in those accounts are formally transferred to retained earnings. Caution, don't close… Unlock the full course today
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Closing revenue, expense, and dividend accounts
Contents
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The importance of accounting
1m 1s
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Clay tokens, sheep, and Italy
2m 6s
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The basic equation
3m 17s
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Expanded accounting equation: SCF
2m 10s
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Expanded accounting equation: IS
2m 47s
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Assets: Planes, trains, and automobiles
2m 18s
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Definition of an asset
4m 26s
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Types of assets: Current
3m 56s
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Types of assets: Long term
4m 37s
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Obligations to suppliers, employees, governments, and customers
3m 13s
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Definition of a liability
3m 48s
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Types of liabilities: Current
4m 2s
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Types of liabilities: Long term
4m 5s
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Contingent liabilities
4m 13s
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Owner's equity: Paid-in capital and retained earnings
2m 6s
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Definition of equity
4m 8s
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Book value vs. net worth
3m 33s
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Other components of owner's equity
4m 20s
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Financial statements: Balance sheet for Walmart
2m 55s
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Where financial statements come from
3m 46s
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The Microsoft balance sheet
4m
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Notes from Microsoft on the balance sheet
4m 43s
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Limitations of the balance sheet
4m 8s
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Differences between the balance sheet and the income statement
2m 6s
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Components of the income statement
4m 4s
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Revenues, expenses, gains, and losses
3m
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Earnings per share
4m 21s
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The Walmart income statement
4m 37s
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Statement of cash flows
2m 49s
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Statement of cash flows: Examples
3m 52s
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The importance of routine bookkeeping
3m 41s
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Impact of events on assets and liabilities, part 1
3m 43s
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Impact of events on assets and liabilities, part 2
3m 5s
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Impact of events on assets and liabilities, part 3
4m 17s
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Impact of events on revenues and expenses, part 1
4m 17s
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Impact of events on revenues and expenses, part 2
4m 9s
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Impact of events on revenues and expenses, part 3
5m 18s
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Impact of events on revenues and expenses, part 4
5m 1s
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The accuracy of debits and credits in the days of real books
3m 19s
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Debits and credits
4m 45s
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Journal entries, part 1
5m 25s
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Journal entries, part 2
4m 53s
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Journal entries, part 3
4m 41s
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T-accounts and posting
3m 29s
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Trial balance: The raw material for financial statements
2m 21s
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The market value of accounting adjustments
1m 57s
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Net income vs. cash flow
5m 9s
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Four general types of adjustments
4m 13s
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Adjusting journal entries, part 1
4m 9s
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Adjusting journal entries, part 2
2m 51s
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Adjusting journal entries, part 3
3m 1s
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Adjusting journal entries, part 4
4m 12s
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Closing revenue, expense, and dividend accounts
3m 21s
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Making the financial statements
4m 52s
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