A “Closed Account” refers to accounts in various fields that have been terminated or finalized. The term is commonly used in both banking and accounting, and it carries specific meanings in each context.
Closed Account in Banking
Definition
A closed account in the banking industry is a bank account that has been terminated by the account holder or the financial institution. This can happen for several reasons, such as switching banks, resolving fraudulent activities, or simply no longer needing the account.
Process of Closing a Bank Account
- Customer Request: The account holder initiates the closure by submitting a request to the bank.
- Verification: The bank verifies the identity of the account holder and ensures that there are no outstanding debts or holds.
- Final Transactions: Any remaining balance is either transferred to another account or paid out to the account holder.
- Official Closure: The bank finalizes the closure, and the account can no longer be accessed.
Examples
- A savings account closed because the holder moved to a different bank.
- A checking account terminated due to bankruptcy or inactivity.
Closed Account in Accounting
Definition
In accounting, a closed account refers to a general ledger account that has been prepared for the next fiscal year by closing off the previous year’s balances. This process includes transferring balances from temporary accounts (like revenue and expense accounts) to permanent accounts (like retained earnings).
Process of Closing an Accounting Period
- Recording Closing Entries: This involves journal entries that transfer balances from temporary accounts to permanent accounts.
- Zeroing Out Entries: The temporary accounts are zeroed out to start the new accounting period afresh.
- Preparing Financial Statements: Final financial statements for the period are prepared and reviewed.
Examples
- Revenue from the previous year is transferred from the Revenue Account to the Retained Earnings Account.
- Expense accounts are closed out to calculate the net income for the year.
Related Terms
- General Ledger: The main accounting record of a company, which uses closing entries to complete the accounting cycle.
- Closing Entry: Journal entries made at the end of an accounting period to transfer balances from temporary accounts to permanent ones.
FAQs
What happens to my money when I close a bank account?
- The remaining balance is typically transferred to another account or paid out to you.
Can I reopen a closed bank account?
- This depends on the bank’s policies. Some banks allow reopening within a specific period, while others do not.
Why is it important to close accounts in accounting?
- Closing accounts is crucial for accurately representing a company’s financial position and ensuring that the new fiscal year starts with zero balances in revenue and expense accounts.
References
- Accounting Principles - Weygandt, Kimmel, and Kieso.
- Federal Reserve Consumer Guide to Bank Services.
- Generally Accepted Accounting Principles (GAAP).
Summary
A “Closed Account” can refer to both a terminated bank account and an accounting procedure for finalizing the fiscal year’s financial records. In banking, it represents the end of an account’s activity, while in accounting, it prepares the company’s ledgers for the new year. Understanding closed accounts is essential for both financial management and accurate accounting practices.
