HOW TO PASS OPENING ENTRIES AND CLOSING ENTRIES?

What is an Opening Entry?

With the beginning of a new accounting period, every businessman has to write and keep a new set of books for business accounts. The accounts not closed in the previous accounting period are recorded in a new set of books with an entry called ‘opening entry’.




In opening entry, all the asset accounts are debited and liabilities accounts are credited. Assets are those which is going to benefit the firm in future as well, and liabilities are those which is liable to pay in future. The difference between the asset and liabilities is to be credited as a capital account.

Now let me give you one example for your understanding!

EXAMPLE PROBLEM:

Rama had the following assets and liabilities on 1st April 2016. cash in hand Rs 800, cash at bank Rs 15,600, stock Rs 15,000, furniture Rs 9,600, plant and machinery Rs 30,000 debtors Rs 8,000, creditors Rs 8,000, bill payable Rs 5,000. Pass the necessary opening entry.
Solution:

Note: cash in hand, cash at bank, stock, furniture, plant and machinery and debtors all are assets which are touchable and will stay in the organization and benefit the organization in future so they are debited. And creditors, bills payable are credits that the business is liable to pay in future. And the balance is taken as capital account which is also credited.

What are the closing entries?

The nominal accounts are closed by transfer to either trading or profit and loss account as the case may be. Journal entries required to transfer the nominal account to trading account/profit and loss account are called “closing entries”.

The closing entries are as follows:

I. Closing entries in trading account:

1. For closing opening stock purchase A/c etc.

Trading A/c---------------------Dr
        To opening stock
        To purchases
        To Sales returns
        To other direct expense

Note: all nominal accounts which are debited to trading account are taken in this entry, except gross profit.

2. For closing sales, purchase return etc.

Sales account--------------------Dr
Purchase return a/c-----------Dr
Sales returns A/c----------------Dr
Other direct expense----------Dr
          To trading account

Note: all nominal accounts which are credited to trading account are taken in this entry, except gross loss.

3. For closing trading account (i.e. transfer of gross profit to profit and loss account)

Trading account-----------------Dr
         To profit and loss a/c

Note: In case of gross loss, the above entry is reversed.

II. Closing entries in profit and loss account:

1. For closing all indirect office and selling expenses

Profit and loss account----------Dr
        To indirect office and selling expenses (individually)

Note: all nominal accounts which are debited to profit and loss account are taken in this entry. But individually means every account will have separate entry, you can’t pass compound journal entry like you pass for trading account.

2. For closing all gain and incomes

Each income a/c---------------Dr
          To profit and loss A/c

Note: all nominal accounts which are credited to profit and loss account are taken in this entry. But individually means every account will have separate entry, you can’t pass compound journal entry like you pass for trading account.

3. For closing profit and loss account

Profit and loss A/c---------------Dr
          To capital A/c

Note: In case of loss, the above entry is reversed.

Now let me give you one (DIY) for your practice let’s see how you will do! Well, practice makes us perfect. Well, I have shared my knowledge with you let’s see did you gained that knowledge?🤗

DO IT YOURSELF (DIY):

1. Journalise the following in the books of Ram, Pass the necessary opening entry.

Rama had the following assets and liabilities on 1st April 2016.
Cash in hand Rs2, 00, 000,
Cash at bank Rs 15,000,
Stock Rs 5,000,
Furniture Rs 19,600,
Plant and machinery Rs 50,000
Debtors Rs 80,000,
Creditors Rs 85,000,
Bill payable Rs 2,000.

2. From the following trading account and profit and loss account pass closing journal entries.

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