Definition and Objectives of Closing Accounts

Definition

Closing accounts are a comprehensive set of financial statements and accounting records prepared at the end of each accounting period (monthly, quarterly, or annually) to summarize all financial and commercial transactions that occurred during the period. These accounts are considered a comprehensive summary of all accounting and financial activities of the organization, representing an important turning point in the accounting cycle where all financial data recorded during the period is collected, classified, and analyzed. They are also considered the main tool for communicating with various parties inside and outside the organization to convey financial information in an organized and understandable manner.

Objectives

• Determine Business Activity Results - Know the amount of profit or loss achieved from operating and investment activities during the accounting period to evaluate the organization's success

• Show True Financial Position - Detailed presentation of all assets, liabilities, and owners' equity at a specific date to give a clear picture of the organization's financial strength

• Provide Useful Information to Users - Supply management, investors, creditors, and lenders with necessary data for making their economic and investment decisions

• Comply with Legal and Regulatory Requirements - Meet the requirements of commercial and tax laws and accounting regulations in force in the country

• Assist Management in Strategic Decision Making - Provide a scientific and reliable basis for future planning, strategy development, and priority setting

• Evaluate Performance and Compare Results - Compare current period results with previous periods and planned targets to measure improvement or decline

• Calculate Tax Obligations - Accurately determine the correct tax base and calculate taxes owed to government agencies

Types of Closing Accounts (Commercial and Government)

Closing accounts are divided into two main types that differ in purpose, application, and standards used:

Commercial Closing Accounts

Primarily aimed at measuring profitability and maximizing returns for shareholders, including:

• Trading Account - Determines gross profit from basic commercial operations
• Profit and Loss Account - Shows final net profit or loss
• Balance Sheet - Displays the company's financial position at a specific date
• Cash Flow Statement - Tracks cash movement from different activities

Government Closing Accounts

Focus on measuring the efficiency of public fund usage and achieving transparency and accountability, including:

• Revenue and Expenditure Account - Alternative to profit and loss account
• Statement of Financial Position - Focuses on public assets and government obligations
• Financial Performance Statement - Measures efficiency of public resource usage
• Cash Flow Statement - Tracks tax revenues and government payments

The basic difference between them is that commercial accounts use commercial accounting standards and serve shareholders and investors, while government accounts follow government accounting standards and serve citizens and public oversight bodies.

Steps for Preparing Closing Accounts

The process of preparing closing accounts requires following sequential and organized steps to ensure result accuracy and compliance with accounting standards:

1. Prepare Initial Trial Balance - Extract balances of all accounts from the general ledger and ensure balance of total debit and credit balances

2. Record Necessary Adjusting Entries - Add all required adjustments such as accrued expenses, deferred revenues, and annual depreciation calculation for fixed assets

3. Prepare Adjusted Trial Balance - Apply all adjustments to original balances to obtain final corrected balances for the period

4. Prepare Detailed Trading Account - Calculate gross profit by subtracting cost of goods sold from net sales including all direct costs

5. Prepare Comprehensive Profit and Loss Account - Calculate net profit or loss by subtracting all operating, administrative, and financial expenses from gross profit

6. Prepare Detailed Balance Sheet - Organized presentation of all assets, liabilities, and owners' equity classified according to their nature and maturity period

7. Record Final Closing Entries - Close all revenue and expense accounts and transfer net result to retained earnings account

8. Prepare Post-Closing Trial Balance - Ensure correctness of closing process and that all revenue and expense accounts have become zero

9. Comprehensive Review and Audit of Results - Examine accuracy of all accounts and ensure compliance with accounting standards and applicable laws

10. Prepare Final Reports and Statements - Prepare official approved copies of closing accounts and distribute them to relevant authorities and users