Closing entries are journalized and posted
A) throughout the accounting period
B) before posting the adjusting entries
C) after preparing the post-closing trial balance
D) after preparing the financial statements
The correct answer and explanation is :
The correct answer is D) after preparing the financial statements.
Explanation:
Closing entries are journalized and posted at the end of an accounting period, specifically after preparing the financial statements. The purpose of closing entries is to transfer the balances from temporary (nominal) accounts to permanent (real) accounts in the general ledger. Temporary accounts include revenues, expenses, and dividends, all of which are reset to zero for the next accounting period. Permanent accounts, such as assets, liabilities, and equity, carry forward their balances into the next period.
Here’s a breakdown of the process:
- Preparation of Financial Statements:
Before making closing entries, the financial statements must be prepared. These financial statements include the income statement, statement of retained earnings (or statement of equity), and balance sheet. To prepare the income statement, you need the balances in the revenue and expense accounts. The statement of retained earnings relies on the net income or loss from the income statement. Therefore, the balances of temporary accounts are essential in preparing accurate financial statements. - Journalizing Closing Entries:
Once the financial statements have been prepared, the temporary accounts are closed by transferring their balances. The process of journalizing closing entries involves:
- Closing revenue accounts: These are credited to the income summary account.
- Closing expense accounts: These are debited to the income summary account.
- Transferring the balance of the income summary account to retained earnings: If there’s a net income, it’s credited to retained earnings, and if there’s a net loss, it’s debited to retained earnings.
- Closing dividend account: Dividends are also closed by transferring their balance to retained earnings.
- Posting Closing Entries:
After the closing entries are journalized, they are posted to the general ledger. This process effectively resets the temporary accounts to zero, making them ready for the next accounting period.
In conclusion, closing entries are made after financial statements are prepared because these entries are based on the finalized balances from the income statement and other statements.