Question

1. What two purposes are accomplished by recording closing entries?
2. Explain whether an error has occurred if a post-closing trial balance includes a Depreciation Expense Account.

Answer 1

A. Purpose of recording closing entries:

1. To draw all the temporary account balance (P&L accounts) to zero to make it ready for new accounting period

2. To transfer P&L to company's retained earning generated during the period to compute the share holder's equity

B. Explain whether an error has occurred if a post-closing trial balance includes a Depreciation Expense Account: Depreciation expense are charged to P&L and accumulated depreciation (balance sheet item) are generally shown as reduction to the asset, so there is no error as such.