Welcome back! You've prepared beautiful financial statements from your adjusted account balances. But there's one final step in the accounting cycle we need to complete.
After preparing statements, we need to close the books - getting ready for the next accounting period!
Engagement Message
Why do you think businesses need to "reset" certain accounts for the next period?
Here's the key insight: some accounts should start fresh each period, while others continue from where they left off.
Temporary accounts (revenues and expenses) should reset to zero. Permanent accounts (assets, liabilities, equity) carry forward their balances.
Engagement Message
Should "Sales Revenue" start fresh each year or carry forward its balance?
Think about it logically: you want to measure this year's sales separately from last year's sales. So Sales Revenue should reset to zero each January 1st.
But your Cash account shouldn't reset to zero - you still have that money!
Engagement Message
Should "Cash" reset to zero at the start of each period or keep its balance?
This is where closing entries save the day! These special journal entries transfer all temporary account balances to Owner's Equity, then zero them out.
It's like moving this period's profits (or losses) into the owner's permanent investment account.
Engagement Message
Where do you think the net income from temporary accounts ends up after closing?
The closing process happens in a specific order: First, close all revenue accounts to a summary account. Then close all expense accounts. Finally, transfer the net result to Owner's Equity.
This ensures nothing gets lost in the transfer!
Engagement Message
Why do you think we close revenues and expenses separately before combining them?
