How, when and why do you prepare closing entries?

Definition of Closing Entries

Closing entries transfer the balances from the temporary accounts to a permanent or real account at the end of the accounting year.

As a result, the temporary accounts will begin the following accounting year with zero balances.

In a computerized accounting system, the closing entries are likely done electronically by simply selecting "Closing Entries" or by specifying the beginning and ending dates of the financial statements.

Examples of Closing Entries

Two examples of closing entries are:

  • The closing of the income statement accounts (revenues, expenses, gains, losses) by transferring their balances to the owner's capital account or the corporation's retained earnings account. This is done after the company's financial statements for the year have been prepared.
  • The closing of the owner's drawing account by transferring its balance to the owner's capital account.

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