Closing Entries
Journal entries that transfer temporary account balances to permanent accounts at period end.
Closing entries zero out temporary accounts (revenue, expenses, dividends) by transferring their balances to retained earnings. The process follows four steps: close revenue to income summary, close expenses to income summary, close income summary to retained earnings, and close dividends to retained earnings. After posting, only permanent accounts retain balances.
Example
At year-end with $200,000 revenue and $160,000 expenses, closing entries move both to income summary, then transfer the $40,000 net to retained earnings.
Why It Matters for Your Business
Closing entries reset your books for the new period so prior revenues and expenses don't bleed into current reports, making year-over-year comparisons possible.
Related Terms
More Accounting Terms
Accounts Payable
Money owed by a business to its suppliers or creditors for goods or services received but not yet paid for.
Accounts Receivable
Money owed to a business by its customers for goods or services delivered but not yet paid for.
Accrual Accounting
An accounting method that records revenues and expenses when they are incurred, regardless of when cash is exchanged.
Asset
Any resource owned by a business that has economic value and can provide future benefits.
Balance Sheet
A financial statement showing assets, liabilities, and equity at a specific point in time.
Related Financial Guides & Resources
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