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    Accounts that do not get closed at the year-end Traditional Perspective- According to traditional accounting perspective, personal (say- creditors, debtors, capital etc) and real accounts (say- land, machinery, patents etc) are not closed and their balances are carried forward for the next accountinRead more

    Accounts that do not get closed at the year-end

    • Traditional Perspective– According to traditional accounting perspective, personal (say- creditors, debtors, capital etc) and real accounts (say- land, machinery, patents etc) are not closed and their balances are carried forward for the next accounting period.

     

    • Modern Approach– According to modern accounting perspective, permanent account are not closed and their balances are brought forward to the next accounting year.

     

    Permanent Accounts-

    Permanent accounts are those accounts that appear at the time of preparation of Balance Sheet. These accounts are measured cumulatively and their balances never get closed until the organization is legally wound up. These accounts include asset account, capital account and liabilities account.

    Example- As on 31st March, yyyy if the ABC and Co. had Cash at Bank amounting to 2,50,000, then that amount will be carried forward (c/f) as opening bank balance in next accounting year. If the bank balance increased by 2,00,000, then at the end of the accounting year Cash at Bank would become 4,50,000. This amount will be again c/f onto the next accounting period and the cycle keeps going.

    A snippet of the cash account will help to develop an understanding of all personal and real accounts whose balances are carried forward to the next accounting period.

    Cash Account

     

    I have also explained the accounts that get closed at the year-end for your better understanding.

    Accounts that get closed at the year-end

    • Traditional Perspective- According to traditional accounting perspective, Nominal accounts (say- factory expenses, salary & wages, depreciation, discount received, interest received etc.,) get closed at the end of the accounting year.

     

    • Modern Perspective- According to modern accounting perspective, the temporary account gets closed at the end of the accounting period. They are closed so that the previous year’s income and expenses do not get mixed with the current year’s income and expenses. This would help the users of financial statements to know the true net profit.

     

    Temporary Accounts-

    Temporary accounts are those accounts which appear at the time of preparation of Income Statement (i.e., trading and profit & loss account). These accounts get settled by either debiting or crediting them yielding Gross profit and Net profit. The temporary account includes expenses account, income account and withdrawals.

    Example- Salary paid 2,00,000 to the employees for the previous year gets closed in the previous accounting period itself and their balances are not carried forward in the next accounting year.

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