What are closing entries used for in accounting?

Closing entries in accounting are specifically designed to transfer the balances of temporary accounts (such as revenue, expenses, and dividends) to the capital account or retained earnings at the end of an accounting period. This process resets the temporary accounts to zero for the next period, allowing for an accurate assessment of financial performance over each distinct accounting period.

The main purpose of these entries is to ensure that all income and expenses are recorded within the appropriate period, providing a clearer picture of profitability and financial changes over time. By doing this, the impact of revenues and expenses on the overall equity of the business is captured accurately, reflecting the accumulated earnings retained in the business.

This practice is essential as it maintains the integrity of financial reporting and ensures that each period's financial results are distinctly reported.