Closed Account
A closed account is a financial term that can refer to two different scenarios:
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Bank or Charge Account: A bank or charge account that has been terminated by either the account holder or the financial institution. This could be due to various reasons such as account inactivity, regulatory issues, or at the request of the account holder.
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Accounting Ledger: In accounting, a closed account refers to a general ledger account that has been prepared for the upcoming financial year by closing off the amounts from the previous year. This process involves transferring balances to the next accounting period and making closing entries.
Examples
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Bank or Charge Account:
- A credit card account that the holder decides to close after clearing all outstanding dues.
- A savings account terminated by the bank due to inactivity over a certain number of years.
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Accounting Ledger:
- At the end of the fiscal year, a company closes its revenue and expense accounts to transfer the net income to the retained earnings account.
- After closing entries are made, the balance in an expense account is zero, and it is ready to record expenses for the next period.
Frequently Asked Questions (FAQs)
Q1: Can a closed bank account be reopened?
A1: It depends on the bank’s policies. Some banks allow an account to be reopened within a certain time frame, while others require a new account to be opened.
Q2: Why is it necessary to close accounts in general ledger accounting?
A2: Closing accounts is essential to update the ledger for the new accounting period accurately. It ensures that revenue and expense accounts start with a zero balance in the new period.
Q3: What happens to the balance of a closed charge account?
A3: Any balance on a closed charge account must be paid off by the account holder. The account will not accumulate new charges after it is closed.
Q4: How does closing an account affect your credit score?
A4: Closing a credit account can affect your credit score by reducing the total available credit and potentially increasing your credit utilization ratio.
Q5: What are closing entries in accounting?
A5: Closing entries are journal entries made at the end of an accounting period to transfer balances from temporary accounts like revenues and expenses to permanent accounts like retained earnings.
- General Ledger: The main accounting record of a company, detailing every financial transaction.
- Closing Entry: A journal entry used to close temporary accounts at the end of an accounting period.
- Net Income: The total profit of a company after all expenses and taxes have been deducted from revenues.
- Retained Earnings: The cumulative amount of net income retained in the company rather than paid out as dividends.
Online References
Suggested Books for Further Studies
- “Financial Accounting” by Walter T. Harrison Jr., Charles T. Horngren, and C. William (Bill) Thomas
- “Intermediate Accounting” by Donald E. Kieso, Jerry J. Weygandt, and Terry D. Warfield
- “Accounting All-in-One for Dummies” by Kenneth Boyd
Fundamentals of Closed Account: Accounting Basics Quiz
### What is a closed account in the context of banking?
- [x] A terminated bank or charge account.
- [ ] An account with zero balance.
- [ ] An account transferred to another bank.
- [ ] An inactive account.
> **Explanation:** In banking, a closed account is one that has been terminated by the holder or the financial institution.
### What is a closed account in general ledger accounting?
- [ ] An account that can't be reopened.
- [x] An account prepared for the next year by closing off the previous year's amount.
- [ ] An account that permanently holds no balance.
- [ ] An account under scrutiny for errors.
> **Explanation:** In general ledger accounting, a closed account is one that has been prepared for the upcoming year by closing off the previous year's amounts.
### How are closing entries related to closed accounts in accounting?
- [ ] They permanently erase the accounts.
- [ ] They combine multiple accounts into one.
- [x] They transfer balances to prepare accounts for the new period.
- [ ] They are optional for businesses.
> **Explanation:** Closing entries transfer the balances from temporary accounts to permanent accounts to prepare for the new accounting period.
### Can a credit card account be reopened once it is closed?
- [ ] Always
- [ ] Never
- [x] Sometimes, depending on the bank's policies.
- [ ] Only after five years.
> **Explanation:** Whether a credit card account can be reopened depends on the policies of the issuing bank.
### What typically happens to the balance in a closed charge account?
- [x] It must be paid off by the account holder.
- [ ] It is forgotten.
- [ ] It is transferred automatically to a new account.
- [ ] It is waived by the issuer.
> **Explanation:** The balance in a closed charge account must be paid off by the account holder.
### Why is it important to close accounts at the end of an accounting period?
- [ ] To reduce workload for the new period.
- [x] To begin the new period with accurate financial records.
- [ ] To comply with legal requirements.
- [ ] To prevent auditing.
> **Explanation:** Closing accounts ensures that the new accounting period starts with accurate financial records.
### What is the ultimate goal of making closing entries?
- [ ] To reset all accounts permanently.
- [x] To transfer balances from temporary accounts to permanent accounts.
- [ ] To eliminate errors.
- [ ] To increase net profit.
> **Explanation:** The goal of making closing entries is to transfer balances from temporary accounts to permanent accounts.
### What type of accounts are typically closed at the end of an accounting period?
- [ ] Permanent accounts
- [x] Temporary accounts
- [ ] Asset accounts
- [ ] Liability accounts
> **Explanation:** Temporary accounts like revenues and expenses are typically closed at the end of an accounting period.
### In general ledger accounting, what does a zero balance indicate at the start of a new accounting period?
- [ ] No transactions occurred.
- [x] The account has been closed for the previous period.
- [ ] The company is idle.
- [ ] The account is redundant.
> **Explanation:** A zero balance at the start of a new accounting period indicates that the account has been closed and is ready for new transactions.
### What may happen if accounts are not closed properly at the end of an accounting period?
- [ ] Enhanced financial reporting accuracy.
- [ ] Reduced financial transparency.
- [x] Errors in financial statements.
- [ ] Improved cash flow.
> **Explanation:** If accounts are not closed properly, errors may appear in financial statements, leading to inaccurate financial reports.
Thank you for delving into closed accounts and tackling our insightful quiz questions. Continue developing your expertise in accounting and financial management!
