Accounting Demystified

Closing Entry

After the financial statements have been prepared, the last step in the accounting process is to close the books. This is done with the use of the closing entry. The closing entry takes all the income and expense accounts and makes their balance zero (0). The income and expense accounts are known as temporary accounts, since the balance is reset to zero each year. Balance sheet accounts are known as permanent accounts, since their balances carry over from year to year.

The temporary accounts are those accounts that are contained on the Income Statement and the Dividend account from the Statement of Retained Earnings. These statements cover a period of time, so the accounts have to be reset to zero so that the next period's transactions ...