Financial Glossary
Closing Journal Entry
A closing journal entry is a bookkeeping entry made at the end of an accounting period to zero out temporary accounts, including revenue, expense, and dividend or draw accounts, and transfer their balances into a permanent equity account such as retained earnings. This resets the income-statement accounts to zero so the next period starts clean. Permanent balance-sheet accounts like assets and liabilities are not closed.
Problem & Application
Without proper closing entries, revenue and expense figures carry forward and distort the next period's results, making month-over-month or year-over-year comparisons meaningless. For owner-operated businesses relying on their books for decisions and tax prep, a clean close ensures each period stands on its own and that equity reflects accumulated profit accurately. Most accounting software automates this, but the logic still has to be correct.
In Short
Closing journal entries draw a clean line between periods, resetting temporary accounts and rolling results into equity so each period reports accurately.