key term - Closing entries

Definition

Closing entries are journal entries made at the end of an accounting period to transfer temporary account balances to permanent accounts. These entries zero out all temporary accounts to prepare them for the next accounting cycle.

5 Must Know Facts For Your Next Test

1. Temporary accounts include revenue, expense, and dividend accounts.
2. Closing entries are typically made after the financial statements have been prepared.
3. The Income Summary account is often used to help close revenue and expense accounts.
4. Permanent accounts, such as assets, liabilities, and equity, are not closed at the end of the period.
5. Failing to make closing entries can result in incorrect financial statements in future periods.

Review Questions

Related terms

Temporary Accounts:

Accounts that track financial results for a limited period and are closed at the end of each period.

Income Summary:

A temporary account used during the closing process to summarize revenue and expenses.

Permanent Accounts:

Accounts that carry their balances into future periods and reflect ongoing financial position.