CLOSING ENTRIES FOR THE FINANCIAL YEAR ENDING

Closing entries for the financial year ending

Hello everyone,

Here we are going to learn how to close books of accounts on the financial year ending by considering following things:-

• Closing stock
• Depreciation
• Provision for expense

Closing stock

Let us start to understand why it is required to pass journal entry for closing stock because to know the material consumed during the period(12 Months) , the value of closing stock includes raw material ,Work in progress , finished goods and loose tools etc . The amount for the stock will be derived by the store keeper from the rates available from market, generally as per accounting standard the stock is valued at cost or net realizable value whichever is less.

Now we need to learn how to pass journal entry for closing stock ,

Illustration:

Value of stock as on 31^st march 2015

Raw material Rs.100000

Work in progress Rs.500000

Finished goods Rs.1000000 

Lose Tools Rs.25000

Here we need to know about the financial statement models in the corporates and firms.

In the companies the closing stock entry will be passed by debiting the closing sock (asset) and crediting the closing stock (income) as we don’t prepare trading account in company as per Company Act Schedule III.

Journal entry will be:

 

SL.NO	PARTICULAR	DEBIT	CREDIT
1	Raw material A/c(Asset)          Dr Work in progress A/c(Asset)     Dr Finished Goods A/c(Asset)        Dr Loose Tools A/c(Asset)            Dr          To Raw material A/c(P&L)          To Work in progress A/c(P&L)          To Finished Goods A/c(P&L)        To Loose Tools A/c(P&L)	1,00,000  5,00,000 10,00,000    25,000	1,00,000  5,00,000 10,00,000    25,000

 Rules for passing Journal Entry

 Debit

 As the closing stock is asset the raw material account is debited to show the stock existence in the                                                          business, by debiting the account we are showing current asset which can be liquidated in near future. This rule is applicable for Raw material, Work in progress, Finished goods and Loose tools.

 The stock will be reflected in balance sheet.

 Credit

 As per the double entry rule there should be equal debit and credit for every journal entry, for the above entry we have to assume that the closing stock has to be decrease from the purchase to know the material consume, so here we are crediting the stock which will be shown deducted from purchase. The stock will be used in the computation of material consumed in statement of profit and loss account.

Depreciation

 Depreciation is charge against profit for wear and tear of fixed assets , every year depreciation on fixed assets has to be created in balance sheet assets are shown at cost minus depreciation up to date of disclosure. There are few words we use it in financial statements related to depreciation

 Gross Block = Historical cost of asset (I.e. Cost of asset at the time of purchase)

 Provision for depreciation account= This account consist of accumulated depreciation of asset.

 Net Block= Gross Block- less- Provision for depreciation account.

The depreciation for different assets will vary depending on the useful life of asset

 Let us take a small illustration:-

 Assets as on 31^st march 2015 Rs.1,50,00,000/-

 Depreciation for the year Rs.25,00,000/-

 Provision for depreciation account balance as on 31^stmarch 2015 Rs.50,00,000/-

 Journal Entry will be

        

SL.NO	PARTICULAR	DEBIT	CREDIT
1	Depreciation A/c      Dr          To Provision for Depreciation A/c	25,00,000	25,00,000

Rules for passing entry will be

Debit

Depreciation is expense and will be debited as per nominal account rule “Debit all expense and Losses”

Credit

Provision for depreciation account is credited with equal amount of depreciation for year, while preparing balance sheet the fixed asset are shown by deducting with amount available in the provision for depreciation account.

Net assets in balance sheet shall be Rs.1,00,00,000/-(1,50,00,000-50,00,000)

 Provision for expense

Provision for expense includes all expense related to last month which are to be payable in next financial year.

Layman view:-

There are some fixed expense and variable expense every month which are booked in books on accrual basis( Credit basis) the same will be paid in next financial year or it make take more than year.

Let us take few examples:-

Rent for the month Rs.15000

Salaries for the month Rs.2,50,000

Income tax provision for the year Rs.1,00,000/-

SL.NO	PARTICULAR	DEBIT	CREDIT
1	Rent A/c      Dr Salaries A/c   Dr          To Outstanding Expense A/c	15,000 2,50,000	2,65,000
2	Income tax A/c   Dr       To Income Tax provision A/C	1,00,000	1,00,000

Rules for passing Journal Entry

Debit

Expenses are to be debited as per nominal account rule “Debit all expense or loss”, the rent will be shown under head other expense, Salaries will be shown under Employee cost and Income tax will be shown as separate line item in statement of profit and loss as per schedule III of companies Act 2013

Credit

The outstanding expense account and Income tax provision are current liabilities need to be paid in near future the same will be shown under the head current liabilities in balance sheet as per schedule III of companies Act 2013.