Performed at the end of an accounting period after financial statements are prepared-closing

process

In accounting, closing a period means that all the balances that are in temporary accounts are
transferred to permanent accounts. This zeroes out the temporary accounts so that they can be
used in the next accounting period.

Temporary accounts are accounts that are only used for a specific time period, usually one
accounting period. They are not part of the chart of accounts of a company.

Revenue, expense, and dividend accounts are excellent examples of temporary accounts.

Another important account that is created as a temporary account and used in the closing
process is the income summary account. The income summary account contains all the
revenue and expense information and is used to calculate the dollar amount that retained
earnings will change during each accounting period. The income summary account will never be
found on any financial statement because it's solely used in the closing process.

Permanent accounts are accounts that once opened will always be a part of the chart of
accounts that a company has. Cash, accounts receivable, accounts payable, and liability
accounts are all examples of permanent accounts.

All the account information that you'll need for the closing entries can be found on the company's
trial balance. The trial balance is a listing of all the company's accounts and their balances. The
easiest way to remember what accounts need to be closed and the manner in which they're
closed is to remember the acronym REID. REID stands for Revenue, Expense, Income summary,
and Dividend.

The use of closing entries resets the temporary accounts to begin accumulating new transactions in
the next accounting period. The basic sequence of entries is:

Debit all revenue accounts and credit the income summary account, thereby clearing out the
balances in the revenue accounts.

Credit all expense accounts and debit the income summary account, thereby clearing out the
balances in all expense accounts.

Close the income summary account to the retained earnings account. If there was a profit in
the period, then this entry is a debit to the income summary account and a credit to the
retained earnings account. If there was a loss in the period, then this entry is a credit to the
income summary account and a debit to the retained earnings account.

TEMPORARY (NOMINAL)
These accounts are closed

PERMANENT (REAL)
These accounts are not closed

All revenue accounts

All asset accounts

All expense accounts

All liability accounts

Owners drawing

Owners capital account

Closing entries are given to close the temporary accounts. After closing the temporary accounts, the
account balances remains zero.
Closing Entries
1. To close revenue accounts:
Revenues

Dr.

Income Summery

Cr.

2. To close expenses accounts:

Income Summery

Dr.

Salaries Expense

Cr.

Utilities Expense

Cr.

Rent Expense

Cr.

Interest Expense

Cr.

Depreciation Expense Cr.

3. a) To transfer net income to owners capital account:
Income Summery
Owners capital

Dr.
Cr.

3. b) To transfer net income to owners capital account:

Owners capital
Income Summery

Dr.
Cr.

4. To close owners drawing accounts:

Owners capital
Owners drawing

Dr.
Cr.

The closing process To close the revenue accounts to income summary. serves a dual
purpose: (1) the temporary accounts (revenues, expenses, gains and losses) are reduced tozero
balances, ready to measure activity in the upcoming accounting period, and (2) these temporary
account balances are closed (transferred) to retained earnings to reflect the changes that have
occurred in that account during the period. Often, an intermediate step is to close revenues and
expenses to income summary To close the expense accounts to income summary. , then income
summary is closed to retained earnings. The use of the income summary account is just a
bookkeeping convenience that provides a check that all temporary accounts have been properly
closed (that is, the balance equals net income or loss).

How To Have A Rational Discussion

02 August 2014 - 13:07 pm

The Blind Traders and the Market

02 August 2014 - 13:31 pm

There is an old parable known as the blind men and the elephant. In this
story, there are four blind men who are asked to determine what an elephant
looks like. The first blind man feels the leg of the elephant and says, The
elephant is like a tree because it is large and round like a pillar. The second
man feels the tail and says, The elephant is like a rope because it is small and
coarse. The third man feels the ear and says, The elephant is like a fan
because it is flat and thin. The fourth man feels the trunk and says, The
elephant is like a snake because it is long and curves.
A king comes to the four blind men and says, all of you are correct. The king
goes on to explain that each one had drastically different descriptions of the
elephant because they are all feeling different parts. So, they are all
correct. The elephant has all the features described by the four blind men.
This parable is a good analogy describing different types of profitable traders.
Many of the arguments that erupt between traders on social media are due to
not understanding the others time frames or not understanding the other
traders position sizing, stop loss level, or expected winning percentage. Also
too many cult members of Elliot Wave, Trend Following, Market Profile, Day
Traders, and option traders etc. think their way of trading price action is the
only way when their way is only one of many paths to profitability. There are as
many ways to trade price action to be profitable as there are profitable traders.
The elephant in the room is that profitable traders do a few things in common:

They manage their losses to keep them small regardless of their winning
percentage.
2. They trade position sizes that bring their potential risk of ruin through a string
of losses to virtually zero.
3. They are an expert in their own profitable strategy.
4. Their emotions are not used in trading decisions.
5. Their ego does not pick position sizing, entries, or exits.
6. They go with the flow of what is actually happening not what they want to
happen.
7. They trade a robust methodology.
8. They do the work required to be successful.
9. They are comfortable with what they are doing.
10. Their trading fits their risk tolerance and personality.
Many profitable traders only see the aspects of the markets that make them
profitable. Seeing the full dynamics of the markets and all the opportunities to
make money is a step toward enlightenment.
1.