Examples of Year-End Closing Journals
You can run closing account processes that post the reverse of the debits and credits in the accounts. For many European countries, the accounts must be closed by recording the net amount between the total debits and total credits.
The requirement is to always consider the resulting net amount between the credit and debit amounts for all year-end journals that are created for:
-
Profit and Loss (Income Statement) Accounts
-
Balance Sheet Accounts
-
Opening Journals for the Next Year for Balance Sheet Accounts
Profit and Loss Accounts
The year-end closing journals process zeros out the balances in the accounts using the reciprocal of the accounts' credits and debits when the last period of the year is closed.
For example, the following table shows the entries for Travel Expense account 6100.
|
Description |
Debits |
Credits |
|---|---|---|
|
Transaction 1 |
100,000 |
|
|
Transaction 2 |
40,000 |
|
|
Ending Balance in Travel Expense Account 6100 |
100,000 |
40,000 |
The following table shows the resulting closing journal that's generated and the entries that zero out the expense account, with the offset booked to retained earnings account 3310.
|
Description |
Debits |
Credits |
|---|---|---|
|
Travel Expense Account 6100 |
40,000 |
100,000 |
|
Retained Earning Account 3100 |
100,000 |
40,000 |
|
Net Ending Balances |
Retained Earnings Account 3100 = 60,000 |
Travel Expense Account 6100 = 0 |
If you run the Create Income Statement Closing Journals process, the process creates a journal that also reverses the debits and credits of the respective profit and loss accounts to close out those account balances to retained earnings. The ending balance in the accounts is the same, regardless of which method is used. The advantage of the closing journal process is that there is a journal to provide an audit trail of what balances were moved to retained earnings.
If you enable the Net Closing Balance Journal ledger option on the Specify Ledger Options page, the closing journals created by the Create Income Statement Closing Journal process use the net amount.
This image shows the Net Closing Balance Journal option in the Period Close section on the Specify Ledger Options page.
The following table shows the entry that's created.
|
Description |
Debits |
Credits |
|---|---|---|
|
Travel Expense Account 6100 |
60,000 |
|
|
Retained Earnings Account 3100 |
60,000 |
|
|
Net Ending Balance |
Retained Earnings Account 3100 = 60,000 |
Travel Expense Account 6100 = 0 |
Balance Sheet Accounts
The current year-end closing process leaves the balances in the balance sheet accounts and rolls them to the new year as beginning balances.
For example, the following table shows the transactions and ending balance at the end of the year for Payables Account 2100.
|
Description |
Debits |
Credits |
|---|---|---|
|
Transaction 1 |
170,00 |
|
|
Transaction 2 |
30,000 |
|
|
Net Ending Balance of Payables Account 2100 |
140,000 |
If you run the Create Balance Sheet Closing Journals process for audit requirements, the process creates a journal entry that closes the selected balance sheet account balances to zero. The process generates journals that reverse the debits and credits of the ending year-to-date actual balances for the period or year that you selected to close.
The following table shows how the process transfers balances to a specified closing account.
|
Description |
Debits |
Credits |
|---|---|---|
|
Payables Account 2100 |
30,000 |
170,000 |
|
Closing Account 3200 |
170,000 |
30,000 |
|
Net Ending Balance |
Closing Account 3200 = 140,000 |
Payables Account 2100 = 0 |
If you enabled the Net Closing Balance Journal ledger option, the closing journals created by the Create Balance Sheet Closing Journals process use the net amount.
The following table shows the journal entry that's created.
|
Description |
Debits |
Credits |
|---|---|---|
|
Payables Account 2100 |
140,000 |
|
|
Close Account 3100 |
140,000 |
At the beginning of the next year, the journal created by the Create Balance Sheet Closing Journals process is reversed and the balances become the beginning balances for the new year.