By "closing the accounts" is meant the periodic transfer of losses and gains to the "profit and loss" or "undivided profits" account of the bank. All losses and expenses cause decreases, and all gains or earnings cause increases in undivided profits.

The Closing Of Earning Accounts

The best practice is to set up a profit and loss account for this purpose to which the earnings and expense items are first closed or transferred. The balance of the profit and loss account is in turn transferred to the undivided profits account of the bank. The profit and loss account, therefore, never retains a balance. The following entries illustrate the closing process:

Debit: Domestic Exchange (28). . . .

$ 500

Credit: Profit & Loss..........................

$ 500

Debit: Commissions Collected (29). .

1,000

Credit: Profit & Loss............

1,000

Debit: Interest on Loans (30)......

19,000

Credit: Profit & Loss............

19,000

Debit: Discount (31)..............

6,000

Credit: Profit & Loss............

6,000

Debit: Interest on Investments (32).

3,000

Credit: Profit & Loss............

3,000

Debit: Bond Profits (33)............

500

Credit: Profit & Loss............

500

The above entries, it will be observed, close out the balances of all the profit accounts. They were debited for the exact amounts of their credit balances. This will be illustrated with domestic exchange. The account stood like this before the closing entry was made:

Domestic Exchange

Debit

Credit

$500

After the closing entry is made is appears in this form:

Domestic Exchange

Debit

Credit

$500

$500

The Closing Of The Expense Or Loss Accounts

The entries required to close out these items are as follows:

Debit: Profit & Loss..............

$5,000

Credit: Expense (22)............

$5,000

Debit: Profit & Loss...............

6,000

Credit: Interest Paid on Deposits (23) ......................

6,000

It should be noted that as the loss accounts have debit balances, it requires credits to close them. Expense stood as shown in the following before the closing entry was made:

Expense

Debit

Credit

$5,000

After the closing entry is posted, however, its balance becomes zero and the account appears thus:

Expense

Debit

Credit

$5,000

$5,000