By the time you reached the end of the accounting year, you probably feel like you’ve done it all. You’ve recorded journal entries for revenue recognition, inventory movements, payroll. You’ve made your adjusting entries for accruals and prepaids. You produced a trial balance and made error corrections. Prepared the financial statements. That’s pretty much it, right? No, there’s one more thing you need to do before you can start the new accounting period: preparing the closing entries. It’s the accounting equivalent of saying “Happy New Year”!

⏱️TIMESTAMPS⏱️
0:00 Introduction to closing entries
0:37 Debits and credits
1:02 Permanent accounts and temporary accounts
1:42 Trial balance after corrections
3:21 Closing entries for temporary accounts
5:18 Income summary account and retained earnings
5:48 Closing entries for dividend accounts
6:18 Post-close trial balance

In a previous video, I covered understanding debits and credits in accounting by using DC ADE LER. DC Debits and Credits. ADE Assets Dividends Expenses, accounts that usually have a debit balance. LER Liabilities Equity Revenue, accounts that usually have a credit balance. Let’s group the accounts slightly differently: into permanent accounts and temporary accounts. Assets, Liabilities and Equity are permanent accounts, their account balance carries over to the next period. Dividend, Expenses and Revenue are temporary accounts, these accounts have to be reset to zero prior to starting a new accounting period. That’s what closing entries do: closing the temporary accounts to a balance of zero, and transferring the outstanding balance to one of the permanent accounts (more specifically Equity).

Philip de Vroe (The Finance Storyteller) aims to make #accounting , finance and investing enjoyable and easier to understand. Learn the business and accounting vocabulary to join the conversation with your CEO at your company. Understand how financial statements work in order to make better investing decisions. Philip delivers #financetraining in various formats: YouTube videos, classroom sessions, webinars, and business simulations. Connect with me through Linked In!

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