Closing entries are the final bookkeeping entries that are entered into accounting records before closing out the accounting period and moving forward in transferring both income and expense data to the records that will represent the next accounting period. The closing entry data that is entered at the end of one period serves as the opening entry data for the new period. This approach makes it possible to easily evaluate the financial condition of the period, and prepare for any adjustments that may need to take place in the coming period.
The use of a closing entry approach makes it possible to understand the impact of both generated revenue or income and the effect of expenses on the net worth of the entity. As an accounting tool, the closing entry can be used just as effectively with monthly accounting ledgers that track a home budget as they can with more complicated corporate accounting. In both cases, the closing entry provides a logical point of data to end one accounting cycle and begin a new one.
By employing a closing entry, it is possible to end a current accounting period with a balance of zero. This is because any remaining balance is treated as a credit. When the transfer forward to the new accounting period is made, a debit is applied to the revenue showing on hand, so that the balance in that particular account becomes zero. At the same time, the transferred balance is recorded as a credit or balance forward for the new period, assuming the balance represents revenue. In the event that the transferred balance represents expenses, it will appear as a debit or expense forwarded.
The use of a closing entry as a common bookkeeping entry continues today with the use of accounting software, as well as in cases where old style ledgers are still maintained. In both cases, it is easy to use the closing entry as a bookkeeping tool to clearly delineate between accounting periods, even when the books are evaluated in terms of both fiscal years and calendar years.
