Question

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

Answer 1

The following two purposes are accomplished by recording closing entries:

1. Bring all temporary accounts (revenue, expenses, and dividends) balance to $0, so that all temporary account balance of next accounting period start with $0 balance.

2. Closing entries transfers revenue, expense, and dividend balance to retained earnings account. As a result, retained earnings and equity account balance gets updated upto date.

Yes, an error has occurred, if post-closing trial balance includes a depreciation expense account. Depreciation expense is a temporary account and it must be closed at the end of the year. Post closing trial balance must contain permenant account balance. Depreciation expense account normal balance is debit. If post-closing trial balance includes a depreciation expense account, then the total debit side balance will be overstated.