What are the four closing journal entries? Why are they necessary
The four closing journal entries are:
Close revenue accounts to Income summary
Close the expenses accounts to Income summary
Close income summary to retained earnings
Close dividends and retained earnings
They are necessary because closing entries made in the accounting cycle bring the income statement accounts to zero so that the new reporting period will start with zero balances
What are reversing entries? Why are they used?
Reversing entries are made of the first day of an accounting period in order to remove certain adjusting entries made in the previous accounting period. Reversing entries are used in order to avoid the double counting of revenues or expenses and to allow for the efficient processing of documents. Reversing entries are most often used with accrual-type adjusting entries.
The closing journal entries are: revenue accounts, expense accounts, dividends, and income summary. All of these entries eventually will get to the retained earnings. These entries are imperative because they transfer a company's net income or net loss as well as dividends to retained earnings. This ensures that the balance for retained earnings matches with the retained earnings statement. Closing entries also gives each temporary account a zero balance so that the next accounting month is started from scratch.
Reversing entries are entries that start at the beginning of the next accounting period rather than adjusting an entry in the previous month (adjusting).
Although the text does not go into much detail about this reverse entries are made when a transactions needs to be reversed and the previous month has already closed so adjusting would not be an option.