Opening and closing entries

15th April 2020 2 By indiafreenotes

Opening entry

An opening entry is the initial entry used to record the transactions occurring at the start of an organization. The contents of the opening entry typically include the initial funding for the firm, as well as any initial debts incurred and assets acquired.

When next financial year begins, the accountant passes one journal entry at the beginning of every financial year in which he shows all the opening balance of assets and all the liabilities include capital. After that, the journal entry is called an opening journal entry. Because all assets have a debit balance, so these are debited in an opening journal entry and all liabilities have a credit balance, hence these are credited in an opening journal entry.

Date                                        Particulars                             Amount                   Amount

                                                   Assets A/c                       Dr.      XX      

                                                   Liabilities A/c                                                           XX

                                                   Capital A/c                                                                XX

In case all assets exceed all liabilities, the excess will be the value of capital which is showed credit side in the opening journal entry. If however, liabilities are more than the value of all assets, then the resulting excess will be goodwill and it will be debited in the opening journal entry.

Usually, different of assets and liability will be positive and the excess value of assets will be shown as capital on the credit of journal entry. Figures of opening balances can be obtained by taking a look at the balance sheet of the previous year

Closing entries

A closing entry is a journal entry that is made at the end of an accounting period to transfer balances from a temporary account to a permanent account.

Companies use closing entries to reset the balances of temporary accounts accounts that show balances over a single accounting period to zero. By doing so, the company moves these balances into permanent accounts on the balance sheet. These permanent accounts show a company’s long-standing financials.

Temporary accounts can either be closed directly to the retained earnings account or to an intermediate account called the income summary account. The income summary account is then closed to the retained earnings account. Both ways have their advantages.

Closing all temporary accounts to the income summary account leaves an audit trail for accountants to follow. The total of the income summary account after the all temporary accounts have been close should be equal to the net income for the period.

Closing all temporary accounts to the retained earnings account is faster than using the income summary account method because it saves a step. There is no need to close temporary accounts to another temporary account (income summary account) in order to then close that again.

Both closing entries are acceptable and both result in the same outcome. All temporary accounts eventually get closed to retained earnings and are presented on the balance sheet.

Example of a Closing Entry

Below are examples of closing entries that zero the temporary accounts in the income statement and transfer the balances to the permanent retained earnings account. This is done using the income summary account.

1. Close Revenue Accounts

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

Date Accounts Debit Credit
31 Dec. 2017 Revenue Rs. 1,00,000  
    Income Summary   Rs. 1,00,000

2. Close Expense Accounts

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

Date Accounts Debit Credit
31 Dec. 2017 Income Summary Rs. 92,000  
    Cost of goods sold   Rs. 8,000
     Depreciation expense         5,000
     Rent Expense        15,000
     Wages expense        15,000
      Interest expense          2,000

3. Close Income Summary

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

Date Accounts Debit Credit
31 Dec. 2017 Income Summary Rs. 8,000  
    Retained earnings   Rs. 8,000

4. Close Dividends

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

Date Accounts Debit Credit
31 Dec. 2017 Retained earnings Rs. 4,000  
      Dividends   Rs. 4,000