 In this presentation we will discuss the discussion question of discuss the reason temporary accounts are closed. So we'll be talking about temporary accounts and the closing process. So in other words this question is basically asking what is the closing process and why are we doing the closing process. In order to approach a question such as this we first might want to consider where the closing process is in the accounting cycle. Remember considering the closing process this might be a good place to start because it gives us an idea of how this fits into the big picture which is often something that will be asked in an open-ended type of essay question such as this. So the closing process is of course at the end at the close of the accounting cycle. The accounting cycle starting with the normal day-to-day transactions the entering of invoices checks bills into the accounting system followed by the creation of the unadjusted trial balance to then be adjusted within the adjusting process. And once with the adjusting process is done we have the adjusted trial balance. That then is used to create the main event the reason for the financial the process of accounting and that's going to be the financial statements. That's what we're doing this process for to create the financial statements. And at the end after the financial statements are done we do the closing process. And that's of course where we are at now. Why do we do that? Why do we do that closing process and what is the closing process? Well the closing process is going to close those temporary accounts to the capital account. And so that's where we can leave here we're going to say okay the temporary accounts what are temporary accounts. Those are going to include all income statement accounts revenue and expenses and the draws account or dividends if it were a corporation which need to be reset to zero in order to start the next process. So what's going to actually happen we're going to take all those accounts do whatever we need to do to them to bring them down to zero and we're going to put the difference into the capital account. So that means that revenue has a credit balance we're going to debit it in order to make it go to zero expenses have debit balances we're going to credit them in order to make them go down to zero and the draws account has a debit balance we're going to credit it to make it go down to zero we're going to put the difference into the capital account result all temporary accounts all income statement account draws account and dividends will now be zero reason so that when we go to the next accounting process the next time period the next month the next year we can start with those temporary accounts at zero counting upwards from zero as we should do when we think about these timing accounts these accounts that are measuring something that is going on over a given time period we need a frame of reference in order to reference these particular accounts. The other reason we're going to see the closing process is that it's going to close them out to the capital account so it's also and it's also making the capital account correct and it's really mirroring what we see in the statement of owner's equity so the statement of owner's equity is showing the beginning balance in equity showing the activity that being net income increasing it and draws decreasing it or dividends decreasing it as well as the investment activity if there's any investments from the owner and we're basically mirroring that with journal entries here so we're showing the beginning capital account which will increase by the net income which should increase the capital or the equity account because it's representing the fact that the company has earned more money and therefore has a net book value and assets minus liabilities and equity value the amount owed to the owners increasing by that net income and it's decreasing by the amount that the owner has taken out either in terms of draws or dividends so the other point of this is to make the equity account correct as of the point in time starting with the beginning equity increasing by net income and decreasing by the draws to get to that ending equity number.