What do you understand by closing entries? Give illustrations to explain them.


Ans – All nominal accounts appearing in the trial balance must be closed at the end of the year by transferring them either to ‘Trading Account’ or to the ‘Profit & Loss Account’. The journal entries required for transferring these accounts to trading or profit & loss account are called ‘Closing Entries’.

The closing entries are passed by applying the following logic:
(i) If as particular account is appearing on the debit side of the trial balance then that particular account is credited and trading or profit & loss account is debited.
(ii) If a particular account is appearing on the credit side of the trial balance then that particular account is debited and trading or profit & loss account is credited.

Additional Information: Value of closing stock as on 31st March, 2001 is Rs. 18,000.
In order to close nominal account appearing in the above trial balance the following Closing Entries will be passed:
(1) Trading Account                     Dr.                1,48,000
          To Opening Stock                                           10,000
          To Purchases                                                  1,25,000
          To Wages                                                       12,000
          To Freight                                                       1,000
          (Being transfer of debit balances to trading account)

(2) Sales account           Dr.                          1,80,000
Closing Stock               Dr.                          18,000
To Trading A/c                                    1,98,000
(Being Transfer of Credit balances to trading A/c & the recording of value of closing stock)

(3) Trading Account         Dr.         50,000

  To Profit & Loss A/c                               50,000
(Being transfer of gross profit to P & L A/c)


(4) Profit & Loss A/c          Dr.             30,000
          To Rent                                          9,000
          To Salary                                         15,000
          To Repairs & Maintenance                  2,000
          To Printing & Stationery                     3,000
          To Advertisement                              1,000
(Being transfer of debit balance to P & L A/c)

(5) Discount on Purchases           Dr.       2,000
Commission Account                               5,000
    To P & L A/c                                              7,000
(Being transfer of credit balances to P & L A/c)

(6) Profit & Loss A/c             Dr.           27,000
          To Capital A/c                            27,000

(Being transfer of net profit to capital a/c)

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