What Is a Closed Account?
A closed account is any account that has been deactivated or otherwise terminated, either by the customer, custodian or counterparty. At this stage, no further credits and debits can be added.
In accounting, a closed account—or closing entry—refers to the annual process of shifting data from temporary accounts on the income statement to permanent accounts on the balance sheet in order to start the new fiscal year (FY) with a balance of zero.
- A closed account is any account that has been deactivated or otherwise terminated, either by the customer, custodian or counterparty.
- The term is often applied to a checking or savings account, or derivative trading, credit card, auto loan or brokerage account.
- It can also describe the accounting practice of resetting temporary account balances to zero on the general ledger at the end of each fiscal year (FY).
Understanding a Closed Account
In finance, when we think about closed accounts, retail or institutional banks, consumer financing companies, and brokerage firms immediately spring to mind. The term can denote the ceasing of any arrangement with a financial institution (FI) to look after a customer's money, whether that be in a checking, savings, derivative trading, credit card, auto loan or brokerage account.
Sometimes it might be the client that opts to close an account. Alternatively, the custodian—the financial institution—that holds customers' securities for safekeeping, may be the one to deactivate it.
Companies can take proactive steps to close customers' accounts if they deem such action to be appropriate. Some accounts are closed immediately. Others are subject to a delay in processing or are contingent on the settlement of trades or on payment obligations.
There are generally no adverse implications for a customer who closes an account. The most obvious exception is when a credit card account is closed. When this happens it could cause the customer to experience a short-term drop in their credit score.
A retail bank, institutional bank, consumer financing company or brokerage firm might have an account closed during any period of the year, depending on its own discretion or the decision taken by its customers. When it comes to company financial statements, however, the act of closing an account is a regular, normal policy that occurs at a set time every 12 months.
Year-end preparation of a company's books involves closing out income statement line items from temporary accounts and posting them to a permanent account housed on the balance sheet. Revenues, expenses, gains, and losses are temporary accounts that are "emptied" into retained earnings—the permanent account—at the end of the fiscal year. In other words, the income statement items are debited and the retained earnings account is credited.
The goal here is to reset the temporary account balances to zero on the general ledger, the record-keeping system for a company's financial data. All revenue and expense accounts must end with a $0.00 balance because they are reported in defined periods and are not carried over into the future. For example, $100 in revenue this year does not count as $100 of revenue for next year, even if the company retained the funds for use in the next 12 months.
Permanent accounts, on the other hand, track activities that extend beyond the current accounting period. On the balance sheet, $75.00 of cash held today is still valued at $75.00 next year.
Closed Account vs. Closed to New Accounts
A closed account is not to be confused with the similar-sounding term: closed to new accounts. The terms closed to new accounts describe an investment vehicle that continues to operate but is no longer accepting new investors. This status can apply to mutual funds, hedge funds or any professionally managed pooled investment vehicle.