if accounts are closed at year end, how come double entry system works?

Discussion in 'General Accountancy Discussion' started by ashareef, Apr 19, 2017.

  1. ashareef

    ashareef

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    i want to understand this concept in accounting. i understand double entry system. i understand the basic process;

    1. create journal of entries
    2. create general ledgers
    3. create income and expenditure statements
    4. make trial balance and it will tally if done right due to the double entry system of record keeping.
    but i am in the impression that some accounts, at the end of financial year will be closed and not carried forward. for example, bank balance will be carried forward to next year. but say, rent paid will not. a new account will be made for next financial with balance 0 (assuming not rent owing or prepaid rent or anything similar). my question is, if closing some of these accounts, what about the double entry system? shouldn't an equal amount from some other account be also 'closed' so that next years trial balance will balance.

    i am not an accountant. this question perhaps has a lot of statements that proves i don't know exactly what's happening.

    can someone please clear this up for me. thank you in advance.
     
    ashareef, Apr 19, 2017
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  2. ashareef

    kirby VIP Member

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    When you use double entry, if you only made entries to balance sheet accounts, which are not closed at year end, then it is easy to see that the trial balance would balance. The income statement accounts are closed at year end, but what you are missing is that their NET balance is then posted to the balance sheet account called retained earnings. So the accounts stay in balance.
     
    kirby, Apr 19, 2017
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