Closing Entries Ultimately Will Affect What?

Closing Entries ultimately will affect retained earnings account as all the temporary accounts (Revenues & Expenses Accounts) firstly transferred to Income Summary Account and then transferred to income summary account which is closed to retained earnings. Dividend and drawings accounts are also closed to retained earnings account which is finally added to owner’s equity or equity account.

Actually, all of the revenues and expenses accounts are created as a result of profitable activities of the owners of the business, so these affect ultimately affect retained earnings and owner’s equity or equity account.

But, closing entry process does not affect permanent accounts such as assets e.g., Cash Account, Accounts Receivable, etc., and liabilities such as Accounts Payable, Loans, etc.

So, we can say that closing entry entry process affects owner’s equity or equity account as the closing of temporary accounts are closed at the end of the accounting period and also as these have no balances while permanent accounts are not closed and transferred to balance sheet.

Closing entries are necessary in order to close all temporary accounts.