Closing entries
In one sentenceEntries recorded at year-end to reset revenue and expense accounts to zero and transfer the net profit or loss to equity.
Simply put
Revenue and expenses are “temporary” accounts that measure one year's profit. At year-end they are closed so the new year starts from zero, and the result is transferred to retained earnings or the owner's current account.
Assets, liabilities and equity are permanent accounts that are not closed; their balances carry over to the following year.
Worked example
A trading business has revenue for the year of 600,000 SAR and expenses of 450,000 SAR.
Closing revenue to the income summary600,000 SAR
Closing expenses to the income summary450,000 SAR
Net profit transferred to retained earnings (600,000 − 450,000)150,000 SAR
Don't confuse it with
Adjusting entriesThey come before closing, and correct balances without resetting them to zero.