What is a 'Closed Account'

A closed account is any account that has been closed out or otherwise terminated, either by the customer, custodian or counterparty. In terms of accounting procedure, a company will close an account with the current year balance to start the new fiscal year with a zero balance.

BREAKING DOWN 'Closed Account'

Closed accounts are applicable in both retail and institutional banking, consumer financing companies and brokerage firms. A retail banking customer can close a checking or savings account, an institutional banking client could close a derivative trading account, a consumer can close a credit card or auto loan account, an investor could close a brokerage account. These entities, if they deem appropriate, can also take proactive steps to close the accounts on the customer. Some accounts are closed immediately, others are subject to a delay in processing or are contingent on settlement of trades or on payment obligations. There are generally no adverse implications for a customer who closes an account. The exception perhaps is when a credit card account is closed. The customer may experience a short-term drop in his or her credit score.

Closed Accounts as Part of Accounting Procedure

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. Sales, expenses, gains and losses are temporary accounts that are "emptied" into retained earnings, the permanent account, at the end of the fiscal year so that the temporary accounts begin with zero balances at the start of the next fiscal year. The income statement items are debited and the retained earnings account is credited. If there are any dividend payments, the dividend temporary account is credited and the retained earnings account is debited.

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