Closing Entries

Definition

Closing entries are made at the end of an accounting period to transfer balances of temporary accounts to permanent accounts, resetting them for the next period. They ensure accurate financial statements by zeroing out revenue, expense, and dividend accounts, reflecting the period's net income or loss.

Example

At year-end, a company closes revenue and expense accounts by transferring their balances to the Income Summary account and then to Retained Earnings. This process distinguishes operating results between periods for analysis and decision-making.

Why It Matters

Closing entries are crucial for financial accuracy, compliance, and performance analysis. They match revenues with related expenses, maintain integrity in financial reporting, and facilitate informed decision-making by delineating financial periods.

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