Closing Entries – Meaning, types and examples

Closing Entries

At the end of the financial year to close the accounts relating to expenses, income, gains, and loss (Nominal accounts) by transferring them to the trading account and profit and loss account. The entries required for such transfer are termed as closing entries. Closing entries are passed at the end of the financial year.

Also Read: 30 transactions with their Journal Entries, Ledger, Trial balance and Final Accounts- Project

Closing Entries Relating to Trading Account –

Balance of All Direct income and Direct expenses transferred to the trading account.

Balance of Direct income transfer to the credit side of trading account.

Balance of All Direct expenses transfers to the debit side of trading account.

Purchases Return Account is closed by transferring its balance to Purchase Account.

Sales Return Account is closed by transferring its balance to the Sales Account.

Closing stock transferred to the credit side of trading account.

Closing Entries Relating to Trading Account as follows:

1. Purchases Return Account is closed by transferring its balance to Purchase Account. Following entry is recorded for this purpose.

Purchases Return A/c                                                              Dr.

To Purchases A/c

(Transfer of Purchases Return Account to Purchases (Account)

2. Similarly, the Sales Return Account is closed by transferring its balance to the Sales Account as:

Sales A/c                                                                                Dr.

To Sales Return A/c

(Transfer of Sales Return Account to Sales Account)

3. Closing entry for those accounts which are to be transferred to the Dr. side of the Trading Account:

Trading A/c                                                                             Dr.

To Opening Stock A/c

To Purchases A/c

To Wages A/c

To Direct Expenses A/c

To Carriage A/c

To Gas, Fuel & Power A/c

To Freight, Octroi & Cartage A/c

To Manufacturing exp. A/c

To Factory Rent & Lighting A/c

To Factory Tax & Insurance A/c

To Custom Duty A/c

To Royalty A/c

To Coal, Gas and Water A/c

To Brokerage and Commission on Purchase A/c

(Transfer of above accounts to the Dr. side of the Trading A/c)

Also Read: 20 transactions with their Journal Entries, Ledger and Trial balance to prepare project

Closing Stock –

The stock of goods remaining unsold at the end of the accounting period is called Closing stock.

Note- According to the convention of conservatism, Closing stock is to be valued at cost price or market price whichever is lower.

Opening  Stock –

The closing stock of last year becomes the opening stock of the current year.

4.Closing entry for those accounts which are to be transferred to the Cr. Side of the Trading Account:

Sales A/c                                                                                 Dr.

Closing Stock A/c                                                                   Dr.

To Trading A/c

(Transfer of above accounts to the Cr. Side of the Trading A/c)

5. Another Closing entry is needed to close the trading account itself. If the credit side of the Trading Account exceeds the debit, the difference will be Gross Profit. The Gross Profit will be transferred to the credit of a newly opened account called profit and loss account:

Trading A/c                                                                             Dr.

To Profit & Loss A/c

(Transfer of Gross Profit to the Credit side of P & L A/c)

6. If the debt side of the Trading Account exceeds the credit, the difference will be Gross Loss. It will be transferred to the debit of profit and loss account by means of the following entry:

Profit and Loss A/c                                                                 Dr.

To Trading A/c

(Transfer of Gross Loss to the Debit side of P & L A/c)

Closing Entries relating to Profit and Loss Account

The preparation of the profit and loss account requires that the balances of (Indirect Expenses and Indirect Income, Gain and Loss) all concerned items are transferred to the profit and loss account, by passing the following closing entries:

Balance of all Indirect income and indirect expenses transferred transfer to profit and loss account.

Balance of all indirect income transfer to the credit side of profit and loss account.

Balance of all indirect expenses transfers to the debit side of profit and loss account.

Balance of losses transfer to the debit side of profit and loss account.

Balance of gains transfer to the credit side of profit and loss account.

1. Accounts of various items of expenses (Indirect expenses) and losses are transferred to the debit side of the Profit and Loss Account by means of the following entry:

Profit and Loss A/c                                                                 Dr.

To Salaries A/c

To Rent, Rates, and Taxes A/c

To Printing and Stationery A/c

To Postage and Telegrams A/c

To General Expenses A/c

To Advertisement Expenses A/c

To Administration Expenses A/c

To Office Expenses A/c

To Bad Debts A/c

To Depreciation A/c

To Bank Charges A/c

To Carriage on sales A/c

To Export Duty A/c

To Commission on Sales A/c

To Discount Allowed A/c

To Salaries and wages A/c

To Carriage Outward A/c

To Legal Expenses A/c

To Financial Expenses A/c

To Sundry Expenses A/c

To Interest on Bank Overdraft A/c

To Other indirect expenses A/c

(Transfer of nominal accounts showing Dr. balances(Indirect expenses and Losses) to the Debit of P & L A/c)

2. Balances of all the accounts of Indirect incomes and gains will be transferred to the credit side of Profit and Loss Account by means of the following entry:

Interest Received A/c                                                             Dr.

Commission Received A/c                                                    Dr.

Rent Received A/c                                                                  Dr.

Dividend Received A/c                                                          Dr.

Discount Received A/c                                                           Dr.

To Profit and Loss A/c

(Transfer of nominal accounts showing Cr. balances to the Credit of P & L A/c)

3. Balances of gains will be transferred to the credit side of Profit and Loss Account by means of the following entry:

Profit on sale of Assets A/c                                                             Dr.

Bad debts Recovered A/c                                                         Dr.

To Profit and Loss A/c

(Transfer of gains accounts showing Cr. balances to the Credit of P & L A/c)

4. For the transfer of credit balance of Profit & Loss A/c, known as net profit to capital Account:

Profit and Loss A/c                                                                 Dr.

To Capital A/c

(Transfer of net profit to Capital A/c)

5. For the transfer of debit balance of Profit & Loss A/c, known as net loss to capital Account:

Capital A/c                                                                              Dr.

To Profit and Loss A/c

(Transfer of net loss to Capital A/c)