Once your fiscal or calendar the year is about over, it is time for a company to make their closing entries to close out the books for the year. What closing entries are required and how do you do them?
There are some accounts that require closing their balances to zero. These accounts are your sales, selling and administrative expenses, and depreciation expenses. All of your expenses will be closed to your retained earnings account as well as your sales account(s). Simply, you will just make a journal entry opposite of what these accounts are normally (debit to sales and credit to expenses) and the difference will go to your retained earnings account. This will zero out your sales and expense accounts, and give you a balance in your retained earnings account. Thus your retained earnings account balance will transfer into your new fiscal or calendar year, and the sales and expenses will start out as zero.
In the followihng years, your retained earnings balance will increase or decrease based upon the sales less expenses balance.
Copyright Jeanine Pfeiffer