Question

Closing entries are necessary at the end-of-each period after financial statements are prepared because---------------

Answer 1

Closing entries are completed at the end of the accounting period to reset the balances of temporary accounts and prepare for the new period. This ensures that financial data remains accurate and segregated by period.

Step-by-step explanation:

Closing entries are necessary at the end-of-each period after financial statements are prepared because they serve to reset the balances of temporary accounts in preparation for the next accounting period. By transferring the balance of revenue, expense, and dividend accounts to the retained earnings, the company ensures that income and expenses from different periods do not get mixed, maintaining the integrity of financial data for each period.

The process of making closing entries involves several steps:

1. Close out Revenue accounts to Income Summary.
2. Close out Expense accounts to Income Summary.
3. Close the Income Summary account to Retained Earnings.
4. Close Dividends (or Withdrawals) account to Retained Earnings.

These steps are crucial for companies to start fresh in the new accounting period and to accurately reflect the changes in their financial position.