Question 2: What are closing entries? Give four examples of closing entries.
Answer:
The preparation of Trading and Profit and Loss account requires that the balances of accounts of all concerned items are transferred to it for its compilation.
For transferring the balance of all the ledger accounts to the concerned head is done through closing entries. Here are some examples of closing entries.
(i) Opening stock account, Purchase account, Wages account, Carriage inwards account and direct expenses account are closed by transferring to the debit side of the Trading and Profit and Loss account. This is done by recording the following entry:
Trading A/c Dr.
To Opening Stock A/c
To Purchase A/c
To Wages A/c
To Carriage Inwards A/c
To All Other Direct Expenses A/c
(ii) The Purchase return or Return outwards account are closed by transferring its balance to the Purchase account. The following entry is recorded for this purpose:
Purchase Return A/c Dr.
To Purchase A/c
(iii) Similarly, the sales return or Return inwards account is closed by transferring its balance to the Sales account is
Sales A/c Dr.
To Sales Return A/c
(iv) The Sales account is closed by transferring its balance to the credit side of the Trading and Profit and Loss account by recording the following entry.
Sales A/c Dr.
To Trading A/c
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