Closing Entries – Introduction

Closing entries transfer the balances of temporary accounts to permanent accounts, resetting them for the next accounting period.

Why are they needed?

• Temporary accounts (Revenue, Expenses, Gains, Losses) only reflect activity for one period.
• At period‑end, we need to zero them out and move their balances to Retained Earnings/Capital.
• This ensures the next period starts with a clean slate.

Types of Closing Entries

1. Revenue & Gain Accounts – Transfer to Profit & Loss Account (credit side).
2. Expense & Loss Accounts – Transfer to Profit & Loss Account (debit side).
3. Profit & Loss Account – Transfer net profit/loss to Capital/Retained Earnings.

Example (Simplified)

Closing Entry Steps

1. Close Revenue:
   • Debit Sales Revenue ₹5,00,000
   • Credit Profit & Loss Account ₹5,00,000
2. Close Expenses (each):
   • Debit Profit & Loss Account with expense amount
   • Credit each expense account
3. Close P&L:
   • If Net Profit, Debit Profit & Loss Account and Credit Capital (or Retained Earnings).
   • If Net Loss, reverse.

Common Mistakes

• Forgetting to close Gain accounts.
• Not transferring Net Profit to Capital.
• Leaving balances in temporary accounts, causing cumulative errors.

Quiz

💡 Final Wisdom: "Closing entries are the bridge that moves this period’s performance into the equity of the next period. Close them correctly and your books stay clean."