What Is a Closing Entry in Accounting?

Creating closing entries is an essential step in business accounting. Each year, you’ll typically need to create journal entries to convert temporary accounts into permanent accounts. Known as “journal entries,” they allow you to close your business’s books for that year. In case this is your first time hearing about closing entries, keep reading to learn more about them and how they work.

Overview of Closing Entries

A closing entry is a journal entry that moves the balances of temporary accounts to those of permanent accounts. Closing entries are designed to reset the balances of your business’s temporary accounts. If the collective balance of your business’s temporary accounts is $25,000, creating closing entries for those accounts will reset them to $0 for the following fiscal year.

In business accounting, there are temporary accounts as well as permanent accounts. Revenue and expenses, for example, are temporary accounts, whereas permanent accounts consist of balances that extend beyond one fiscal year, such as assets and liabilities.

At the end of a fiscal year, you should move the balances of your business’s temporary accounts into permanent accounts by creating journal entries for them — an accounting process that’s known as creating closing entries.

After creating closing entries, you’ll typically want to check the post-closing trial balance. Doing so will allow you to verify the closing entries are correct.

How to Create Closing Entries in Quickbooks

Assuming you use Quickbooks Desktop, you won’t have to manually create closing entries. Intuit’s popular desktop-based accounting software creates closing entries automatically.

As explained on the official Quickbooks website, Quickbooks Desktop performs automatic income and expense accounts at the end of your specified fiscal year. When the new fiscal year rolls around, all your business’s temporary accounts, including those with income and expense, will have a $0 balance, allowing you start off on the right foot.

Closing entries are nothing more than journal entries that move the balance of your business’s temporary accounts into those of permanent accounts. They are used to reset temporary accounts at the end of a fiscal period, essentially making them $0 for the following fiscal period. Hopefully, this gives you a better understanding of closing entries and how they work. Of course, you won’t need to create them manually if you use Quickbooks Desktop, as the accounting software performs this accounting process automatically on your behalf.

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