Preparation of Closing Entries
In accounting, financial statements are prepared at a predetermined frequency. At the end of the accounting period there is preparatory work to do in order to be prepared for the next accounting period. Largely, this involves “resetting” the income statement to zero so that organizations can track profit earned in the new period. This is done through closing entries. However, if the purpose of the financial statements is not well understood this will be a challenging task.
Component Skills:
- Define and prepare both the Income Statement and Balance Sheet
- Recognizing the Income Statement Covers a period of time while the Balance Sheet is a snapshot in time
- Knowing how to do journal entries
- Knowledge of account types and their normal balance
- Knowing the difference between temporary accounts and permanent accounts
- Understanding the basic account types (assets, liabilities, revenues, expenses, equity)
- Understanding the impact of debits or credits on each account type
- Recognition of the impact to relevant equity accounts
Example for "Preparation of Closing Entries":
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