Final answer:
Closing entries are used in accounting to transfer the balances of temporary accounts to a permanent equity account, such as retained earnings, to prepare for a new accounting period.
Step-by-step explanation:
The purpose of closing entries is to transfer balances in temporary accounts to a permanent account. At the end of the accounting period, closing entries are made to prepare the accounts for the next period. This involves transferring the balances of temporary accounts (such as revenue, expenses, and dividends/drawings) to the permanent equity account, typically the retained earnings account for corporations or capital accounts for other forms of business. This process zeroes out the temporary accounts so they can start the new accounting period with a zero balance.
Temporary accounts track financial results over a specific period, whereas permanent accounts carry their ending balance into the next period and are displayed on the balance sheet. Examples of temporary accounts include Sales Revenue, Expense Accounts, and Dividends Declared. The closing process helps to separate financial performance over discrete time periods and to ensure that retained earnings accurately reflects the cumulative net income less any dividends paid out to shareholders.