What Is the Purpose of Closing Entries?

The purpose of closing entries is to transfer financial data from temporary accounts to the balance sheet or income statement. As part of this, the temporary accounts are balanced to zero so that data is not carried over to the next accounting period.

Temporary accounts are only used for a specific accounting period and do not reflect financial performance of a company. The permanent balance sheet and income statement accounts are designed for this purpose. Accounts that are typically closed off include revenue, dividend and expenses. Once these temporary accounts are zeroed out, the balance is either debited or credited to the balance sheet and income statements depending on whether a profit or loss was made in the preceding accounting period.