Financial Accounting Basics: Part 1 – Getting Started
Financial Accounting Basics: Part 2 – Double Entry Accounting
Financial Accounting Basics: Part 3 – Post to the General Ledger
Financial Accounting Basics: Part 4 – Unadjusted Trial Balance
Financial Accounting Basics: Part 5 – Posting Adjusting Entries
Financial Accounting Basics: Part 6 – Adjusted Trial Balance
Financial Accounting Basics: Part 7 – Creating Financial Statements
Financial Accounting Basics: Part 8 – Post Closing Entries
This article is an introduction to creating closing statements to prepare your books for next year.
In Part 7 we created the financial statements and external reports. Once you are done with your financial statements, you need to post some closing entries to prepare your books for next year. A “Closing Entry,” is a journal entry that you post to clear out all of your temporary accounts like revenues, expenses, and dividends to permanent accounts in the balance sheet.
At BIG News your journal would look something like this. You would debit your revenue accounts and you would credit your expense accounts. To clear them down to zero, the balance of $13,900 goes to retained earnings in the equity section of your balance sheet. These are your profits that you are holding onto for the future.
So, if we look at your trial balance again:
We can see your revenue and expense accounts have been reset to nil and now you are ready to tackle the new year!
Altogether these steps make up the accounting cycle and this is what Financial Accounting is all about. It is the process of identifying, recording, summarizing, and analyzing your business’s financial transactions and reporting them in financial statements. Please take another read through and try some numbers yourself. This may have seemed complicated at first, but with practice it gets simpler. Having walked through this article series, you should now have a high-level understanding of the processes behind accounting. There are also several accounting software’s out there that will help you do this and automate and check your balances for you!
We want to help you understand this process so you can use it yourself in your business. If you are still having difficulty, give us a call over at BIG and we can help explain further!
Download this resource article Financial Accounting Basics for Startups and Entrepreneurs: Part 8 – Post Closing Entries (pdf).