At the end of the fiscal year and after preparing the financial statements, some accounts are closed and their balances are canceled and some accounts are rotated and carried over to the next fiscal period. Accounts can be classified for the purpose of closing them into real (permanent) accounts and nominal (temporary) accounts.
Real (permanent) accounts
These are the accounts that are not closed and their balances are carried forward and rotated to the next financial period, and they include all the accounts in the statement of financial position, which are the assets, liabilities and capital accounts.
Nominal (temporary) accounts
They are the accounts whose balances are closed at the end of the financial period, so that their balance becomes zero, and they include the revenue account and the expense account in the income statement, and these accounts are closed in a special account called the profit and loss account (income summary), so that the expenses that have debit balances are closed By making it a credit, and the revenue account that has credit balances is closed by making it a debit, as follows
Close the profit and loss account (income summary):
After closing the expenses and revenues account in the profits and losses account, the balance of profits and losses will appear debit if the expenses are greater than the revenues, and this means that the enterprise has achieved a loss at the end of the period, and the balance appears credited if the revenues are greater than the expenses, and this means that the enterprise has made a profit, and then it is closed The profit and loss account (income summary) in one of the property rights accounts (the capital or the current account of the owner of the facility or in the retained profits and losses account) as follows:
In case of loss:
Debtor creditor statement
From H/Neighbour, the owner of the facility, the capital, or the account of A.K. is withheld
xxx to h/profit and loss (income summary)
Closing the account of A.K. in the account of the owner of the establishment or the account of the capital or the account of A.K. is held
Note: From a practical point of view, closing the profit and loss account (income summary) in the capital account will lead to a change in the balance of the capital account from one financial period to another, and this leads to a difference in the value of the capital from what is recorded in the establishment contract of the establishment, and this is contrary to the applicable laws In some countries, which requires changing the capital into legal procedures, it is therefore preferable to close it in the current account of the owner of the facility or in the account of retained profits and losses.
The personal withdrawals account is considered one of the temporary accounts, which is closed in the capital account or in the current account of the owner of the establishment by making it in the credit party, but closing the personal withdrawals account in the capital account will lead to changing the balance of the capital account from one financial period to another, and its balance will differ from What is registered in the establishment contract of the establishment, and this is contrary to the laws in force in some countries, so it is preferable to close it in the current account of the owner of the establishment.
Closing the personal withdrawals account
Debtor creditor statement
From the owner of the facility
xxx to h/personal withdrawals
Closing the personal withdrawals account in the current account of the owner of the facility
After closing the temporary nominal accounts, a trial balance is made after the closing and the balance sheet is prepared, which will contain all the permanent real accounts, which will be recycled and carried over to the next fiscal period. Thus, we have finished explaining the accounting cycle.