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Close all temporary accounts at the end of an accounting period

Customer Question

Why is it necessary to close all temporary accounts at the end of an accounting period and does the accounting period have to be monthly?

The answer to this question must be at least three paragraphs.
Submitted: 6 years ago.
Category: Business and Finance Homework
Expert:  milanvr replied 6 years ago.

Dear Friend,

Accounts can be defined as the written, detailed or summary, record of a person's management or administration of an estate or of a particular matter / financial transactions arising out of particular set of transactions.

When some project is to be executed, there comes with it sets of financial transactions which includes purchase of assets, plant and machinery, payment of wages, payment of interests, loans, purchase of purchase of goods, receipts of sale of goods, payment of various charges and utilities etc., and all these have have a common thread in running. All have "financial transactions"

Temporary Accounts are the accounts that does not appear on the balance sheet; also called Nominal Account. Revenue and expense accounts, along with income distribution accounts (such as dividend) are temporary accounts. The balances in all temporary accounts are transferred to the capital or the retained earnings account, leaving the temporary accounts with zero balances. This procedure, called closing, is necessary to determine a periodic net income (or loss) and prepare books for the next period.. Therefore, it is necessary to close all temporary accounts at the end of an accounting period to properly and accurately determine net income or loss and prepare books for the next period.

It is not necessary to have monthly accounting periods. On the contrary, is most of the cases, there is a periodical reviews of such nominal / temporary accounts by the management to gather MIS and other strategic information but they are closed ONLY at the end of the accounting period, i.e. annually and made zero.

I hope the above helps.

Regards,

milanvr,
Satisfied Customers: 972
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