Plain definition
A closing entry transfers the balances of temporary accounts—normally revenue, expenses, and distributions where relevant—into the appropriate equity account at the end of a reporting cycle. It resets the income-statement accounts so the new period begins at zero, while permanent balance-sheet accounts continue. It is a mechanical year-end or period-end step after the accounts have been adjusted and reviewed; it does not fix unrecorded transactions or replace annual financial-statement preparation.
Illustrative example
Monetary examples use Saudi riyals (SAR). The same principles apply in other currencies.
At year-end, a company has of revenue and of expenses after all adjustments. Closing entries transfer the net result to retained earnings, then reset revenue and expense accounts for the next year. If an expense invoice is discovered after the close, finance corrects the underlying period according to its policy; it does not hide the error inside the closing journal.
The figures are hypothetical. The destination can differ for a sole proprietor, partnership, or company, and a loss reduces equity rather than adding to it.
Why it matters
If temporary accounts are not closed correctly, a new period can begin with prior-period income or costs, making current performance meaningless. If the closing entry is used as a plug, the equity movement may look tidy while the underlying accounts remain wrong.
Practical consequence
Use a controlled close journal that references the final reviewed income statement, names the destination equity account, and requires independent review. Lock ordinary posting after the close, but keep a documented process for authorised corrections. Reconcile the net result transferred to the approved statements and retain the journal IDs and evidence.