Final answer:
Closing the books or closing the accounting period involves reducing all nominal accounts to zero and transferring the net income or net loss to the owners' equity account.
Step-by-step explanation:
The formal process you are referring to is known as closing the books or closing the accounting period. This process involves reducing all nominal accounts (revenue, expense, and dividend accounts) to zero and transferring the net income or net loss to the owners' equity account.
For example, at the end of each fiscal year, a company will close its revenue and expense accounts by transferring their balances to the owners' equity account. If the company generated a net income, it would increase the owners' equity. If there is a net loss, it would decrease the owners' equity.
Closing the books helps create accurate financial statements and provides a clear picture of the company's financial performance during a specific period.