Temporary accounts are the ledger accounts that track a single accounting period’s activity and then get reset so the next period starts fresh. Revenue, expense, and dividend (or drawing) accounts are the typical temporary accounts. Their purpose is to measure period performance; at fiscal year-end those balances are transferred into retained earnings or an equivalent equity account so the income statement reflects only the current period. Harold Averkamp at AccountingCoach explains the mechanics of closing entries and why balances are zeroed for the new period, providing a practical walkthrough used by many small businesses and bookkeeping courses.
How closing normally happens
Under traditional manual bookkeeping, closing entries are prepared and posted by an accountant or bookkeeper at the end of the fiscal period. The entries debit revenues and credit expenses to an income summary or directly to retained earnings, then move dividends to retained earnings. This process ensures comparability across periods and prevents prior-period results from carrying forward as operating amounts. The Financial Accounting Standards Board FASB establishes the broad reporting framework for periodic financial statements in the United States, making periodic closing consistent with the reporting objective required by US GAAP.
Are closings automatic at fiscal year-end?
Whether temporary accounts close automatically depends on the accounting system in use. Many modern cloud and desktop accounting packages include an automatic year-end close function that posts closing entries and locks the closed period; the software’s internal process performs the same debits and credits an accountant would prepare. Automatic closing is a convenience, not a change in the accounting principle. Even when software performs the close, a knowledgeable preparer must review the results and reconcile retained earnings, because automatic processes can carry forward misclassifications or uncleared adjustments.
Consequences and practical considerations
If temporary accounts are not properly closed, net income can be misstated and revenue and expense accounts can carry inappropriate beginning balances, misleading financial analysis and harming stakeholder decisions. For tax reporting and statutory filings the fiscal year-end close must also align with local regulations; jurisdictions differ on filing dates and audit requirements, so companies should follow both accounting best practice and local legal obligations. Small cultural or territorial practices, such as fiscal year alignment with government budgeting cycles in some countries, can influence when and how organizations schedule their close. Professional oversight from qualified accountants reduces risk and ensures the closing achieves its intended accounting and regulatory goals.