Closing Entries

4 minutes
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Hello, and welcome back. My name is Justin from pin numbers. And in this course today we're going to be talking about closing entries. So so far in this course, we've been looking at the accounting equation, the double entry, debit and credit accounting transactions, putting this into general journals, and then translating this into T accounts or using a worksheet method and then creating a trial balance. After we credit the trial balance, we then make adjustments. And we're now at the point we've got an adjusted trial balance and we're ready to create a balance sheet and a profit loss statement.

Now when we start to go through our trial balance, this was all balancing fine with a debit and credit on each side. But when we start to move this across to the balance sheet, we realized that there's actually a missing component to our balance sheet now We're actually working out a net net assets, net assets is your assets minus your liabilities. And what this, if you look at the actual equation itself, what this should actually be doing is, if you take off your assets minus your liabilities, this should equal whatever your equity balances. But one thing you noticed when you first bring this across into the balance sheet is that the net assets does not equal the equity initially. And it's all got to do the equation. And the reason is, is because of profit.

Now, profit is actually for the current period is actually sitting in the profit and loss statement. But the problem is, until we bring that profit across into the balance sheet, a balance sheet is not going to balance. So initially, when we look at just these three items together, that the assets itself includes all of the current assets, current liabilities, and as well as check capital, reserves, as well as the opening balance of return. earnings, what we actually need to be including is the actual profit as well into the equation. And the reason is because if we don't, then our balance sheet is not going to balance. So, if we take your profit loss statement for the current period, if you think about this, when you do double entry accounting, one side will go into the profit and loss.

And another side could be going to an asset as a sale, for example, where you debit your cash or accounts receivable and you credit your sales revenue. The thing is, that's great when you're doing the double entry journals. The problem is when you start to create a balance sheet, it doesn't automatically flow into retained earnings. So what you actually need to do is once you've got all of your profit and loss, you actually need to do a it's not a real journal. As such, it's more of a process of transferring the profit to be included in your retained earnings balance. And if you don't, then you're not going to have an equation that balances and you're not going to have a balance sheet that balances and you're not going to have a net assets, that equals your equity.

So what we'll be doing in the next lecture is we'll be going through a live the life case study again. And we'll be looking at a practical example of this, of how the closing entry process actually works. But conceptually, this is how it works. You really just looking for the profit to be included into equity balance. And there's probably one other item that does also need to be included as a closing entry is any dividends that are actually paid out or declared in the current period also needs to be transferred into the equity balance. And so if you don't include this, the only balance that will be in the equity will be a share capital, your reserves and the opening balance of retained earnings.

So really, what you're doing is if the components of the retained earnings that are occurring during the period, the transferring cross, which is the profit as well as the dividend declared or paid for the period. Alright, so in the next lecture, we'll go through a live example. We'll see that

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