Chapter 4 Accounting Information Systems 169The Closing ProcessPresent Period End of the Present Period Future Periods
Permanent accounts:
Assets
Liabilities End of present period
Stockholders’ Equity balances carried forward
Capital Stock to future periods
Retained Earnings
Temporary accounts: Closing entries:
Revenues Transfer period Zero balances carried forward
Expenses balances to to the beginning of the
Dividends Retained Earnings next period.
the following twelfth month. The period most commonly used is the calendar year.
Other periods are not unusual, especially for businesses organized as corporations. For
example, a corporation may adopt a fiscal year that ends when business activities have
reached the lowest point in its annual operating cycle. Such a fiscal year is called the
natural business year. At the low point in its operating cycle, a business has more time
to analyze the results of operations and to prepare financial statements. For example,
Wal-Mart,Dell Inc.andThe Gap Inc.have natural business years (fiscal periods) that
end at the end of January after the busy holiday season.Closing Entries
After the adjusting entries have been posted to Online Solutions’ ledger, shown in
Exhibit 15, the ledger is in agreement with the data reported on the financial statements.
The balances of the accounts reported on the balance sheet are carried forward from
period to period. Because the balances are maintained between periods, these accounts
are called permanent accounts. In order for the net income for each period to be deter-
mined, the balances reported on the income statement are not carried forward from
period to period. Likewise, the balance of the dividends account, which is reported in
the retained earnings statement, is not carried forward. Because these accounts report
amounts for only one period, they are called temporary accounts.
To report amounts for only one period, temporary accounts should have zero bal-
ances at the beginning of a period. How are these balances converted to zero? The bal-
ances of revenue, expense, and dividends accounts are transferred to retained earnings.
The entries that transfer these balances to retained earnings are called closing entries.
The transfer process is called the closing process. This closing process is diagrammed
below.In a double-entry accounting system, a closing entry is normally prepared for each
of the three categories of accounts that are closed. That is, three separate closing en-
tries are prepared for revenues, expenses, and dividends. For Online Solutions, these
three closing entries are shown in Exhibit 14.
After the closing entries have been posted to the ledger, as shown in Exhibit 15,
the balance of the retained earnings account will agree with the amount reported on
the retained earnings statement and the balance sheet. In addition, the revenue, ex-
pense, and dividends accounts will have zero balances.