Final Answer:
At the beginning of the next period, temporary accounts should have zero balances. To achieve this, temporary account balances are transferred to permanent accounts at the end of the accounting period. The entries that transfer these balances are called closing entries. The transfer process is called the closing process.
Step-by-step explanation:
In accounting, temporary accounts include revenue, expense, and dividend accounts. These accounts are closed at the end of an accounting period to reset their balances to zero for the next period. Closing entries are made to transfer the balances of these temporary accounts to permanent accounts such as retained earnings. The purpose of the closing process is to summarize the financial results of the period and prepare the accounts for the upcoming period.
The closing entries involve debiting or crediting the temporary accounts to zero them out and transferring the net balance to the retained earnings account. For example, if there is a net income for the period, the income accounts are credited, and retained earnings are debited for the same amount. If there is a net loss, the process is reversed. Dividend accounts are also closed by debiting retained earnings and crediting the dividend account. This ensures that the temporary accounts start the new period with zero balances.
In summary, closing entries play a crucial role in the accounting cycle, ensuring that financial records accurately reflect the performance of the business during a specific period and facilitating the preparation of financial statements for stakeholders.