CLOSING ENTRIES

Periodically, usually at the end of the accounting period, all revenue and expences account balances are trasnferred to an account called income summary or Profit and Loss account and are then said to be closed. The balances in the Profit and Loss account, which is the net income or net loss for the period, is then transferred to the capital account and thus the profit and loss account is also closed.

In the case of corporation the net income ot net loss is transferred earnings account which is apart of owners equity. The entries which are passed for transferring these accounts are called as closing entries. Because of the periodic closing of revenue and expences account, they are called as temparaory or nominal accounts.

On the other hand, the assets, liabilities and owener's equity accounts the balances of which are shown on the balance sheet and are carried forward from year to year are called as permanent or real accounts.

In our example sales account and interest account are revenues, and purchases account and and salaries account expences. Purchases account is and expences because the entire goods have been sold out in the accounting period itself and hence they become cost of goods sold out.

This aspects would become more clear when the reader proceeds to the lessons on profit and loss account.