Accounting U3 AOS2

Question 1

Order of closing entries

Answer 1

• close revenue accounts
• close expense accounts
• transfer profit and drawings to capital

Question 2

Characteristics and assumptions relating to closing of accounts

Answer 2

Period assumption - resetting the account balances of revenues and expenses to zero in readiness for the start of the next period so that net profit can be accurately compared for the current period to previous periods

Relevance - ensures that only revenues and expenses for the current period are reported in the Income Statement meaning the most accurate assessment of trading performance can be made and used as a basis for decision-making

Accrual basis assumption

Question 3

Need for closing entries

Answer 3

• calculation of profit for the current reporting period
• return the revenue and expense accounts to zero in readiness for the commencement of the next period