Which of the following accounts will not be closed to the capital account at the end of the year?

What Is a Closing Entry?

A closing entry is a journal entry made at the end of accounting periods that involves shiftingdata from temporary accounts on the income statement to permanent accounts on the balance sheet. Temporary accounts include revenue, expenses, and dividends, and these accounts must be closed at the end of the accounting year.

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What Is a Closing Entry?
Key Takeaways:
Understanding Closing Entries
Income Summary Account
Recording a Closing Entry
Special Considerations
Balance Sheet Accounts
Income Statement Accounts
Chart of Accounts
Which of the following accounts is not closed at the end of the year?
Which accounts is not closed during the closing process?
Which of the following accounts will be closed to the capital accounts at the end of the fiscal year?
What accounts must be closed at the end of the year?

Key Takeaways:

A closing entry is a journal entry made at the end of the accounting period.
It involves shiftingdata from temporary accounts on the income statement to permanent accounts on the balance sheet.
All income statement balances are eventually transferred to retained earnings.

How to Make a Closing Entry

Understanding Closing Entries

The purpose of the closing entry is to reset the temporary account balances to zero on the general ledger, the record-keeping system for a company's financial data.

Temporary accounts are used to record accounting activity during a specific period. All revenue and expense accounts must end with a zero balance because they are reported in defined periods and are not carried over into the future. For example, $100 in revenue this year does not count as $100 of revenue for next year, even if the company retained the funds for use in the next 12 months.

Permanent accounts, on the other hand, track activities that extend beyond the current accounting period. They are housed on the balance sheet, a section of the financial statements that gives investors an indication of a company’s value, including its assetsand liabilities.

Any account listed on the balance sheet, barring paid dividends, is a permanent account. On the balance sheet, $75 of cash held today is still valued at $75 next year, even if it is not spent.

As part of the closing entry process, the net income (NI) is moved into retained earnings on the balance sheet. The assumption is that all income from the company in one year is held onto for future use. Any funds that are not held onto incur an expense that reduces NI. One such expense that is determined at the end of the year is dividends. The last closing entry reduces the amount retained by the amount paid out to investors.

Income Summary Account

Temporary account balances can either be shifted directly to the retained earnings account or to an intermediate account known as the income summary account beforehand.

Income summary is a holding account used to aggregate all income accounts except for dividend expenses. Income summary is not reported on any financial statements because it is only used during the closing process, and at the end of the closing process the account balance is zero.

Income summary effectively collects NI for the period and distributes the amount to be retained into retained earnings. Balances from temporary accounts are shifted to the income summary account first to leave an audit trail for accountants to follow.

Recording a Closing Entry

There is an established sequence of journal entries that encompass the entire closing procedure:

First, all revenue accounts are transferred to income summary. This is done through a journal entry debiting all revenue accounts and crediting income summary.
Next, the same process is performed for expenses. All expenses are closed out by crediting the expense accounts and debiting income summary.
Third, the income summary account is closed and credited to retained earnings.
Finally, if a dividend was paid out, the balance is transferred from the dividends account to retained earnings.

Important

Modern accounting software automatically generates closing entries.

Special Considerations

If a company’s revenues are greater than its expenses, the closing entry entails debiting income summary and crediting retained earnings. In the event of a loss for the period, the income summary account needs to be credited and retained earnings reduced through a debit.

Finally, dividends are closed directly to retained earnings. The retained earnings account is reduced by the amount paid out in dividends through a debit, and the dividends expense is credited.

The accounts that are used to sort and store transactions are found in the company's general ledger. The general ledger is often arranged according to the following seven classifications. (A few examples of the related account titles are shown in parentheses.)

Assets (Cash, Accounts Receivable, Land, Equipment)
Liabilities (Loans Payable, Accounts Payable, Bonds Payable)
Stockholders' equity (Common Stock, Retained Earnings)
Operating revenues (Sales, Service Fees)
Operating expenses (Salaries Expense, Rent Expense, Depreciation Expense)
Non-operating revenues and gains (Investment Income, Gain on Disposal of Truck)
Non-operating expenses and losses (Interest Expense, Loss on Disposal of Equipment)

Balance Sheet Accounts

The first three classifications are referred to as balance sheet accounts since the balances in these accounts are reported on the financial statement known as the balance sheet.

Balance sheet accounts
- Assets
- Liabilities
- Stockholders' (or Owner's) equity

The balance sheet accounts are also known as permanent accounts (or real accounts) since the balances in these accounts will not be closed at the end of an accounting year. Instead, these account balances are carried forward to the next accounting year.

Income Statement Accounts

The four remaining classifications of accounts are referred to as income statement accounts since the amounts in these accounts will be reported on the financial statement known as the income statement.

Income statement accounts
- Operating revenues
- Operating expenses
- Non-operating revenues and gains
- Non-operating expenses and losses

The income statement accounts are also known as temporary accounts since the balances in these accounts will be closed at the end of the accounting year. Each income statement account is closed in order to begin the next accounting year with a zero balance.

The year-end balances from all of the income statement accounts will be combined and entered as a single net amount in Retained Earnings (a balance sheet account within stockholders' equity) or in a proprietor's capital account.

Note: If an account has not had any activity in the current or recent periods, it is often omitted from the current general ledger.

Chart of Accounts

The chart of accounts is simply a list of all of the accounts that are available for recording transactions. This means that the number of accounts in the chart of accounts will be greater than the number of accounts in the general ledger. (The reason is that accounts with zero balances and no recent entries are often omitted from the general ledger until there is a transaction for the account.)

The chart of accounts is organized similar to the general ledger: balance sheet accounts followed by the income statement accounts. However, the chart of accounts does not contain any entries or account balances.

The chart of accounts allows you to find the name of an account, its account number, and perhaps a brief description. It is important to expand and/or alter the chart of accounts to accommodate the changes to an organization and when there is a need for improved reporting of information.

In some accounting software, the chart of accounts is also used to designate where an account will be reported in the financial statements.

Which of the following accounts is not closed at the end of the year?

Capital account is a permanent account and hence is not closed at the end of the accounting period.

Which accounts is not closed during the closing process?

Permanent accounts are never closed. Permanent accounts are those that keep continuous balances in them, even when the new year starts. All Asset Liability and equity accounts, except drawing, are permanent accounts and never get closed out.

Which of the following accounts will be closed to the capital accounts at the end of the fiscal year?

The temporary accounts get closed at the end of an accounting year. Temporary accounts include all of the income statement accounts (revenues, expenses, gains, losses), the sole proprietor's drawing account, the income summary account, and any other account that is used for keeping a tally of the current year amounts.