Accounting Question?

Question

Please explain WHY a negative, end of the year balance (a loss) is CREDITED in the new year opening balance - AND - a positive, end of the year balance (a gain) is DEBITED in the new year opening balance??? We are completely confused!!! Thanks!

Answer 1

The fact you're confused indicates that you are sane.

Why is this required? It just is the way accounting is.

If you want to minimize the problem use a single entry bookkeeping system such as QuickBooks.

Good Luck,
Dana B.

Answer 2

Maybe I am misunderstanding your question, but it seems to me that you are referring to closing our books for this period and getting it ready for the next. There are certain accounts that are permanent, meaning we don't close or reset back to zero at the beginning of the next period. Other accounts are temporary, meaning they get closed and reset back to zero.

Revenues and expenses are temporary accounts. So we reset them back to zero to begin the next period fresh and clean. And be able to say how much were revenues for this period vs last time. Now in the closing process, we transfer the revenue accounts to something called Income Summary. It's a temporary account that holds the value. And we'd debit revenue accounts and credit income summary.

We'd also close out expense accounts by crediting them and debiting Income Summary. Now depending upon whether expenses are greater than revenues or the reverse, we may have the debit side of Income Summary being the larger. Or it might be the credit side that's the bigger figure. If the debit side is greater, we had a loss for the period. If the credit side is higher, we had a profit.

After we've zeroed-out the revenue and expense accounts to Income Summary, we then close that account to capital or retained earnings. So the period's loss or profit is transferred to the running history of profits and losses. For a sole-proprietor, that would be the Capital Account. And for a corporation, it would be Retained Earnings.

So my guess here is that you're referring to the process of closing our books for this period and getting ready to begin the next. And if that's correct, then I explained how we close revenues, expenses, and income summary. With a loss, the income summary account will have a debit balance. So to close that, we'd credit it and transfer that loss by debiting the capital or retained earning account,. And if we had a profit, income summary would have a credit balance. And we'd close it by debiting it and transferring the balance with a credit to capital or retained earning.

Once this is done, we have updated our running profit and loss history to make that correct. And have reset revenue and expense accounts back to zero so we can tell exactly how much money we're bringing in and spending the next period.