Definition of 'Closing Entry'
A journal entry made at the end of the accounting period. The closing entry is used to transfer data in the temporary accounts to the permanent balance sheet or income statement accounts. The purpose of the closing entry is to bring the temporary journal account balances to zero for the next accounting period, which aids in keeping the accounts reconciled.
Investopedia explains 'Closing Entry'
As with all other journal entries, the closing entries are posted in the general ledger. After all closing entries have been finished, only the permanent balance sheet and income statement accounts will have balances that are not zeroed. For example, revenue, dividend, or expense accounts are temporary accounts that need to be zeroed off and the balance transfered to permanent accounts.
The sequence of the closing process and the associated closing entries is:
1. Close revenue accounts to income summary, by debiting revenue and crediting income summary.
2. Close expense accounts to income summary, by debiting income summary and crediting expense.
3. Close income summary to retained earnings, by debiting income summary and crediting retained earnings.
4. Close dividends to retained earnings, by debiting retained earnings and crediting dividends.