Which of the following is true about closing entries?

Closing entries play a critical role in the accounting cycle by ensuring that the temporary accounts (like revenues and expenses) are reset for the new fiscal period. The process involves transferring the balances of revenue and expense accounts to the equity section of the balance sheet, typically through the retained earnings account. This action effectively clears out the temporary accounts, which will start with zero balances in the next accounting period, allowing for a fresh start in tracking revenues and expenses.

By moving the totals of revenues and expenses to equity, closing entries provide a clear view of the company's performance over a specific period and fundamentally impact the retained earnings, which is a key component in understanding the company’s overall financial health. Understanding this function of closing entries is essential in accounting because it maintains the integrity of financial statements, prepares for the accuracy of subsequent financial reporting, and reflects the true results of operations in the retained earnings account.