Question

1.       What are the possible effects of not preparing the closing entries at the end of the reporting period and in the subsequent periods?

2.       Why is there a need to close the books at the end of each reporting period? Cite one or two assumptions/principles/concepts.

Answer 1

1) A) Without making closing entries the temporary accounts ( nominal accounts) are never  been closed . If temporary accounts contains balance after year end then it creates trouble during updating temporary accounts in the next financial year. Because every financial year starts with zero balance in temporary accounts.

B) Without closing entries , capital account can never been updated . Without closing entries it is impossible to know the exact closing capital balance through statement of owner's equity . .

C) Without making closing entries the net effects of temporary accounts on permanent accounts are never been ascertained .

2)

A) It is necessary to update capital account .

B) It is necessary to provide accurate picture through the statement of retained earnings and balance sheet .

C) Closing entries are necessary to closed off all the temporary accounts . At the starting of next financial year , all temporary accounts must have only zero balances .

D) Closing entries are must required to show the net effects of temporary accounts on permanent accounts (Shareholder's equity) .

According to accounting period principle closing entries are indispensable to show the net effects of one year of business operations.

Matching principle is considered very vital for making closing entries . Because on the basis of matching principle , revenues and expenses are all matched with each other through income summary. Like wise the same net income and dividends matched with each other through retained earnings  .