Journal entries made at the end of an accounting period to transfer balances of temporary accounts (revenue, expenses) to permanent accounts (retained earnings).
Closing entries reset the balances of all revenue, expense, and dividend accounts to zero at the end of each accounting period. This prepares the books for the next period by transferring net income or loss to Retained Earnings. The process involves: 1) Close revenue accounts to Income Summary, 2) Close expense accounts to Income Summary, 3) Close Income Summary to Retained Earnings, 4) Close dividends to Retained Earnings. Modern accounting software performs this automatically at year-end.
At year-end, a company with ₹50,00,000 revenue and ₹35,00,000 expenses closes both to Income Summary (₹15,00,000 profit), then transfers ₹15,00,000 to Retained Earnings. All revenue and expense accounts now show zero.
Ensures accurate financial reporting and record-keeping
Helps maintain regulatory and tax compliance
Enables better-informed business decisions
Improves operational efficiency and cash flow management
They reset temporary accounts (revenue, expenses) to zero so you can track each period's performance independently. Without closing entries, revenue and expenses would accumulate across years, making it impossible to measure individual period performance.
In modern accounting software like Laabam.One, closing entries are automated. The system performs year-end closing at the click of a button, transferring all temporary account balances to retained earnings.
A record of a financial transaction in the accounting system, showing the accounts affected, amounts debited and credited, date, and description.
The cumulative net profits of a company that have been kept in the business rather than distributed as dividends to shareholders.
A financial statement that summarizes a company's revenues, costs, and expenses over a specific period to show net profit or loss.
The master accounting record that contains all financial transactions of a business, organized by account.
Let Laabam.One handle the complexity. From invoicing to GST filing, our ERP software makes accounting effortless.