Closing Entries

It was stated earlier that items of revenues and expenses are transferred to either Trading Account or Profit and Loss Account. Such transfers are achieved by means of journal entries technically called closing entries. The process of framing a closing     entry or closing entries is very simple. A debit balance in an account is credit and either Trading Account or Profit and Loss Account is debited. Similarly a credit balance in an account is debited and Trading Account or Profit and Loss Account is credited. Closing entries in journal may be divided into two classes – simple and compound. A simple closing entry is one in which only two accounts are affected, that is, one account to be debited and another to be credited with an equal amount.

In a compound entry there may be: (a) several accounts to be debited and only one to be credited or (b) one account to be debited and several to be credited; or (c) several accounts to be debited others to be credited. It must be made clear that in all cases: (i) the sum of debits must be equal to sum of credit; and (ii) a compound entry should never be made in order to combine two unrelated entries or those occurring on two different dates. Normally compound entries are used. Closing entries relating to Trading Account are given below:

(i)    For closing of debit accounts

Trading Account                        Dr.
    To Opening Stock
    To Purchases Account
    To Sales Returns Accounts
    To Wages Account
    To Factory Rent Account
    To Carriage Inwards Account

(ii)    For closing of credit accounts

Sales Account                         Dr.
Purchases Account                    Dr.
    To Trading Account

(iii)    For closing the trading accounts

Trading Account                        Dr.
    To Profit and Loss Account
(For gross loss – debit side exceeds credit side)

The following is the pro-forma of the trading account when it is prepared as a separate account but the items stated therein are the same when it is prepared as the first section of the Trading And Profit and Loss Account:


The trading account has a different type of heading from those of ordinary account prepared so far. Though it is a part of double-entry book-keeping. It is headed for the year ended… The gross profit or loss is described as being c/d and is carried down to the profit and loss account.

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