How, when and why do you prepare closing entries?

Definition of Closing Entries

In a manual accounting system, closing entries involve a company's temporary accounts. The main purpose of the closing entries is to 1) move the balances from a company's revenues and expense accounts, and 2) record their net amount, net income, in 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.

After the closing entries, each revenue and expense account will begin the next accounting year with a zero balance.

In computerized accounting systems, the closing entries will be done electronically by simply selecting "Closing Entries" or by specifying the beginning and ending dates needed for the financial statements.

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