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Business Accounts: Closing Entries

Introduction

Business activities are complex undertakings due to the procedures involved in their operations. Even though, people may argue that it requires common knowledge to operate a business; some guidelines must be observed to manage business investments (Todman 2012). There is the need to establish a record-keeping system that will outline business transactions. These transactions aim at showing the profits or losses made by a business after a trading period. Business records involving finances are transferred to closing accounts that account for activities within a trading period.

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Definition

A closing entry is a representation of the financial undertakings of a business in a given period. These accounts are prepared annually or biannually but this does not restrict a business from preparing a quarterly closing statement (Braqq 2009). The period after which these accounts are prepared is determined by an organization’s preferences, the complexity of financial structure and policies.

Importance of Preparing Closing Accounts

People invest in business activities to make profits at the end of trading periods. Therefore, closing accounts enable investors to know if they have made profits or losses. This is possible through closing all minor accounts (income and expenses) in the ledger book and preparing balance sheets, trading and profit and loss accounts (Johnston 2009). These accounts bring the profit and loss balances to zero and offer a clear platform for the next trading period. In the process, all transactions are accounted for and thus the business keeps a record of all debit and credit transactions. Secondly, closing entries enable traders to prepare and transfer profits and losses (net) to the balance sheet account (Johnston 2009). This is an essential account that must be distributed to shareholders to inform them how the business performed during a stated period. In addition, balance sheets are vital tools that indicate a company’s ability to repay loans (Todman 2012). Lastly, closing accounts enable companies to keep record of their performance. This is an essential tool for evaluating their business worth and develops tactics to improve weak areas and make use of the company’s abilities.

The accounts closed depend on the business and its policies even though some must be closed regardless of the business. Debit and credit accounts are closed to establish the performance of the business through preparing profit and loss accounts (Braqq 2009). Later, this account is closed to pass the entries to the balance sheet to identify the net profit or loss. Withdrawal and dividend accounts are closed and their details are transferred to the profit and loss accounts to show the company’s balances at the end of a trading period.

Merchandizing

This is a business promotional tactic that aims at selling a product by associating it with another. The two products are usually related in nature and are used to allow consumers to buy one product to take advantage of the promotion. A service business offers skills, expertise and consultancy services to clients and is available in various forms and categories (Johnston 2009). Washing a car after gassing it in a gas station is an example of a merchandising business while seeking medical attention from a health facility is a service business.

The difference between a service and a merchandising business is based on the nature of the services offered. A merchandising business offers various products to consumers while a service business specializes in one product (Todman 2012). Secondly, merchandising businesses get their products from other companies and producers while service businesses train and develop their skills to offer quality services to their clients. Lastly, merchandized products change depending on human tastes and preferences while service businesses rarely change but improve their quality through training, experience, and education (Braqq 2009). There are three types of merchandising accounts which include the balance sheet, trading, and profit and loss accounts.

Conclusion

Business accounts are vital tools for evaluating business performance after trading periods. Businesses that operate without these accounts expose their investments to losses and bad debts associated with poor management. Business accounts enable investors to keep records of all business activities.

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References

Braqq, S. (2009). Fast Close: A Guide to Closing the Books Quickly. New York: Wiley.

Johnston, S. (2009). The Manual of Business. California: Cengage Learning.

Todman, F. (2012). Wall Street Accounting: A Description of the Business of Brokerage. Baltimore: BiblioBazaar.

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StudyCorgi. 2022. "Business Accounts: Closing Entries." March 5, 2022. https://studycorgi.com/business-accounts-closing-entries/.

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StudyCorgi. (2022) 'Business Accounts: Closing Entries'. 5 March.

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