Why is it necessary to close the expense accounts at the end of an accounting period?
To prepare the accounts for the next period, the revenue and expense accounts need to be closed at the end of an accounting period. The purpose of closing the expense accounts is to transfer their balances to the Income Summary account.
The Process of Closing Expense Accounts
When closing the expense accounts, the total expense amount needs to be transferred to the Income Summary account. This is done to ensure that the financial statements accurately reflect the company's expenses for the period.
Debit Entry to Income Summary
In the case of the Coronado Laundry Service, where the total expenses amount is $3200, a debit entry is made to the Income Summary account for the total expense amount. This entry reduces the balance in the expense accounts to zero, indicating that the expenses have been closed for the period.
Correct Entry to Close Expense Accounts
The correct entry to close the expense accounts includes a debit to Income Summary for $3200. By making this entry, the expense accounts are effectively closed, and the balances are transferred to the Income Summary account for further analysis.
Closing the expense accounts ensures that the company's financial records are accurate and up to date. It also helps in calculating the net income and preparing the financial statements for the next accounting period.
In conclusion, closing the expense accounts is an essential step in the accounting process to ensure the accuracy of financial reporting and to facilitate the preparation of financial statements for the next period.