Definition
Closing Balance is the debit or credit balance remaining on a ledger account at the end of an accounting period. This balance will show up on the balance sheet on that particular date and is carried forward to the next accounting period.
- A debit closing balance (such as an accrual) will be carried forward to the credit side of a ledger.
- A credit closing balance (such as a prepayment) will be carried forward to the debit side.
Examples
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Cash Account:
- At the end of the financial period, the cash account shows a debit closing balance of $10,000. This amount will be the opening balance for the cash account in the next period.
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Accrued Expenses:
- An accrued expense reflects expenses that have been incurred but not yet paid. If accrued expenses account shows a debit closing balance of $2,000, this will be carried forward to the credit side in the next accounting period.
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Prepaid Insurance:
- If the prepaid insurance account has a credit closing balance of $500 at year-end, it will be carried forward to the debit side in the next accounting period.
Frequently Asked Questions
What happens to the closing balance at the end of an accounting period?
The closing balance at the end of one accounting period is carried forward to the beginning of the next accounting period. It will show as the opening balance for the new period.
How is the closing balance recorded on the balance sheet?
The closing balance is recorded on the balance sheet as part of the overall financial position of the company. The sum of all closing balances for various accounts will help in forming the balance sheet.
Why do we need to carry forward the closing balance?
Carrying forward the closing balance ensures continuity in the financial records. It provides an accurate starting point for the new accounting period, showing the financial position from where operations will continue.
Can the closing balance be both debit and credit?
Yes, accounts can end up with either a debit or a credit closing balance depending on the nature of the transactions recorded in them. Asset accounts usually end with debit balances, while liability and equity accounts usually end with credit balances.
What is the consequence of an incorrect closing balance?
An incorrect closing balance can lead to inaccurate financial statements in both the current and the subsequent periods. This can mislead stakeholders and impact financial decision-making.
Related Terms
- Accounting Period: The span of time covered by financial statements, usually a month, quarter, or year.
- Balance Sheet: A financial statement that summarizes a company’s assets, liabilities, and shareholders’ equity at a specific point in time.
- Accrual: Expenses and revenues that have been incurred but not yet recorded in the accounts.
- Prepayment: Payments made in advance for services or goods to be received in the future.
- Debit Balance: The amount by which debits exceed credits in an account.
- Credit Balance: The amount by which credits exceed debits in an account.
Online Resources
Suggested Books for Further Studies
- “Financial Accounting” by Jerry J. Weygandt
- “Intermediate Accounting” by Donald E. Kieso, Jerry J. Weygandt, and Terry D. Warfield
- “Accounting Made Simple: Accounting Explained in 100 Pages or Less” by Mike Piper
Accounting Basics: “Closing Balance” Fundamentals Quiz
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