Closing entries are journal entries recorded at the end of an accounting period to transfer the balances of accounts of all concerned items to the Trading and Profit and Loss Account for its compilation. The preparation of financial statements requires that the balances of nominal accounts (expenses, losses, incomes, and gains) are closed out to determine the profit or loss for the year.

Accounts such as Opening Stock, Purchases, Wages, and Carriage Inwards are closed by transferring their balances to the debit side of the Trading Account. Similarly, Sales and other revenue accounts are closed by transferring their balances to the credit side of the Trading Account. Expenses and Losses (like Salaries and Rent) are transferred to the Debit side of the Profit and Loss Account, while Incomes and Gains (like Commission Received) are transferred to the Credit side.

Four examples of closing entries are:

1. For closing direct expenses accounts: Trading A/c Dr. To Purchases A/c To Wages A/c

2. For closing revenue accounts: Sales A/c Dr. To Trading A/c

3. For closing indirect expenses accounts: Profit and Loss A/c Dr. To Salaries A/c To Rent of building A/c

4. For closing income accounts: Commission received A/c Dr. To Profit and Loss A/c