Q9: What are ‘closing entries’?
Unlike a firm’s assets, liabilities and equity accounts, the revenue and expenses accounts of a firm are not permanent accounts. They simply record a firm’s revenue and expenses for an accounting period. At the end of an accounting period, we prepare a firm’s financial statements based on its accounts as adjusted or changed by various balance-day adjustments. Once we have finalised a firm’s financial statements, we then ‘close off’ or empty out all the revenue and expenses general ledger accounts. A firm’s revenue and expense accounts start a new period with a zero balance.
Closing off all the revenue and expenses accounts of a firm at the end of an accounting period involves making general journal entries which reduce a firm’s revenue and expenses accounts to zero. The balances in the revenue and expenses accounts of a firm at the end of an accounting period are generally transferred to a profit and loss account in the general ledger. This is now usually done automatically by accounting software packages; at the click of a button.