What do closing entries accomplish?

Closing entries play a crucial role in the accounting cycle by zeroing out temporary accounts and transferring their balances to permanent accounts. Temporary accounts include revenues, expenses, and dividends, which are reset to zero at the end of an accounting period. This closure is essential because it ensures that the financial statements reflect only the transactions of the current period, preventing the blending of data from previous periods.

When closing entries are made, the net income or loss from the temporary accounts is transferred to a permanent account, typically retained earnings. This process not only allows for a fresh start in the subsequent fiscal year but also maintains the integrity of the permanent accounts, which accumulate data over time. By effectively performing these actions, closing entries help provide accurate and up-to-date financial information for stakeholders and facilitate better financial reporting for the upcoming periods.