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:

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:

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

The Closing Of The Expense Or Loss Accounts

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

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

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

Expense