The idea of realization depreciation is, on the basis of the principles above, that depreciation is directly dependent on the associated revenues, being thus a function of them. Treatment of Expenditure, Revenue, and Financial Accounts in Closing Figure 4 illustrates the principle of the closing process by depicting the closing entries for expenditure-revenue bookkeeping. In order to calculate the annual net income all realized revenues and expenses of the accounting period are gathered from the books on the income statement account, which is the first closing account. The annual net income is given by the balance of the income statement account. Unexpired expenditures and financing accounts are closed on the balance sheet account, which is the second closing account.
Undistributed profit is entered on the credit-side as retained earnings.
Thus the concept of retained earnings, which is central in accounting based on the GAAP, does not come up in expenditure-revenue accounting at all before this stage. The function of the balance sheet is to transfer the ending balances of the unexpired expenditures and the financing accounts on to the next accounting period, where they become the beginning balances of the relevant accounts. Income determination is the underlying purpose of expenditure-revenue accounting. As has been discussed at great length in this paper, matching naturally is the critical stage of annual income determination. All rules affecting matching through determination of expenses or unexpired expenditures affect the annual income.