Accounts that are closed at year end
/Which Accounts are Closed at Year End?
At the end of a company's fiscal year, all temporary accounts should be closed. Temporary accounts accumulate balances for a single fiscal year and are then emptied. The reason for using temporary accounts is to track financial activity for just a single fiscal year. Conversely, permanent accounts accumulate balances on an ongoing basis through many fiscal years, and so are not closed at the end of the fiscal year.
At the end of the fiscal year, closing entries are used to shift the entire balance in every temporary account into retained earnings, which is a permanent account. The net amount of the balances shifted constitutes the gain or loss that the company earned during the period. After the closing entries have been completed, the ending balances in the temporary accounts are zero, and are now ready to accumulate transactions for the next fiscal year.
Once the year-end processing has been completed, all of the temporary accounts have been emptied and therefore "closed" for the current fiscal year. A flag in the accounting software is then set to close down the old fiscal year, which means that no one can enter transactions during that time period. Another flag can be set to open the next fiscal year, at which point the same temporary accounts are opened, now with zero balances, and are used to begin accumulating transactional information for the next fiscal year.
Thus, the only accounts closed at year end are temporary accounts. Permanent accounts remain open at all times.
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Types of Temporary Accounts
The most common types of temporary accounts are for revenue, expenses, gains, and losses - essentially any account that appears in the income statement. In addition, the income summary account, which is an account used to summarize temporary account balances before shifting the net balance elsewhere, is also a temporary account. Examples of temporary accounts are revenue, cost of goods sold, rent expense, utilities expense, compensation expense, and benefits expense.
Types of Permanent Accounts
Permanent accounts are those that appear on the balance sheet, such as asset, liability, and equity accounts. Examples of permanent accounts are as follows:
Cash. This account contains the amount of cash kept on-hand by the business.
Marketable securities. This account contains the amount of all securities held by the business. It usually represents excess cash holdings that are not needed for immediate day-to-day needs.
Accounts receivable. This account contains all uncollected trade receivables for sales made on credit to customers.
Fixed assets. This account contains the cost of all fixed assets acquired by the business.
Accounts payable. This account contains all trade payables for purchases made on credit from suppliers.
Common stock. This account contains the amount received from the sale of common stock to investors.
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