How to close your accounts : Learn the right way
Closing of accounts is last step in accounting. During this article, we have a tendency to method to shut your accounts in right way and conjointly perceive details to be taken care of whereas closing of accounts in processed computer code.
How to shut your accounts
Closing of accounts involves journal entries to transfer temporary accounts to permanent accounts. Financial gain ledgers and expense ledgers are temporary accounts. Lets comprehend it with begin.
Types of ledgers:
There are 5 forms of ledgers:
- Income accounts
- Expense accounts
- Assets accounts
- Liability accounts
- Capital accounts
In closing procedure, balances of assets, liabilities and capital accounts are transferred from balance to record.
Steps of closing:
- Credit expense accounts balance and debit earnings report (Profit and loss accounts)
- Debit financial gain accounts balance and credit earnings report (Profit and loss accounts)
- Find profit / loss at the year in earnings report and if there’s profit, debit financial gain outline account with it and credit to preserved earning or capital account. If there’s loss, credit financial gain outline account and debit to preserved earning or capital account.
XYZ Ltd has $10000 financial gain and $3200 expense in year finish. We are going to do closing entry as per follow:
Income a/c Dr $10000
To financial gain outline account $ ten thousand
Income outline account Dr $3200
To account statement $3200
Income outline account Dr $6800
To preserved Earning account $6800
How to do closing in machine-controlled environment:
Today, most of the accounting tasks are machine-controlled. However, please pay attention of following whereas closing accounts in processed software:
- Write off dangerous debts by debiting dangerous debts and crediting client accounts.
- Make correct checks whether or not all the Invoices are issued to customers.
- All the provider bills ought to be taken care of.
- Write off depreciation at the yearend by debiting depreciation and crediting quality accounts.
- Do bank reconciliation.
- Consider prepayments and accruals.
In international firms, there are several subsidiary firms. During this case, final profits of subsidiary are transferred to company and shutting procedures is taken care subsequently. There also are sub ledgers of ledgers. In this case, balances of sub ledgers are transferred to ledgers and shutting of books is handled subsequently. Times and efforts are needed as per size of business to shut the accounts.