Closing Entry

Revenue and expense accounts measure performance for a single period, such as a year. Once the period ends and the financial statements are prepared, these accounts need to start again from zero, so the next period's results are measured separately.

Closing entries do this. They transfer the year's total revenue and total expenses into retained earnings, the part of equity that holds profits kept in the business. Any dividends declared during the year are also closed into retained earnings.

For example, if a business had revenue of 400,000 and expenses of 340,000 during the year, closing entries reduce both accounts to zero and add the profit of 60,000 to retained earnings.

Accounts that close each period are called temporary accounts. Asset, liability and equity accounts are permanent accounts: their balances carry forward from one period to the next. In modern accounting software, closing entries are usually generated automatically at year-end.