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Skip to 0 minutes and 11 seconds Welcome in this video. We discover the some accounts are temporary accounts that need to be closed at the end of the year. And also we see what retained earnings are and how they relate to the equity account the temporary accounts are the revenues the expenses and the dividends at the end of the year these accounts are closed and transferred into the Retained Earnings account. The region earning is a component of the equity are described by the accounting identity that we saw in week one. Now let’s imagine that we have some positive balances in these accounts that need to be closed. Let’s assume that we have a credit for revenues for six hundred expenses debited for 250 and dividends for 150.

Skip to 1 minute and 5 seconds These amounts need to be closed and transferred into the region earnings. How do we do this. Well with debit and credit each temporary account and posted to the region earnings accordingly. Now let’s see how we close the books. Step by step. Let’s start with a revenue account that had the credit for six hundred in order to close that account when it to debit the revenues for six hundred and post it by crediting six hundred into the region earnings account. Next would do the same thing for the expense account. We credit to 50 and debit the Retained Earnings account for the same amount last the dividends account.

Skip to 1 minute and 55 seconds In order to close this account we need to credit dividends account 450 and debit it into the region. Earnings are the end of this process. The remaining balances of our temporary accounts is now zero. The Retained Earnings account shows the amount of net income that the company keeps after having distributed dividends to its shareholders. We see now that the account of the region earnings has a balance of two hundred retaining earnings is an equity account and is disclosed in the balance sheet.

Closing the Books at the End of the Year

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In this video, we will guide you through an essential step in financial accounting: how do companies reconcile and summarize thousands of transactions and make sure of their integrity prior to the estimation of income and book value of equity. Attend carefully to the video prior to moving to the next article and the quiz - the next two steps.

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Introduction to Financial Accounting

University of Padova

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