Reviewed by Oct 05, 2020| Updated on
Any account that has been de-activated or terminated either by the account holder or by the counterparty is known as a closed account. Once an account is closed, no debit or credit transactions can be done through the account.
In an accounting context, a closed account or a closed entry means the annual process of shifting data from temporary accounts on the income statement to the permanent accounts on the balance sheet to begin the new financial year with a zero balance. In other words, closing entry is resetting the temporary accounts to zero on the general ledger at the end of every financial year.
The act of closing account is a normal event that occurs once every 12 months and is common among companies and businesses. As stated above, revenues, expenses, losses, and gains are the temporary accounts that are emptied from the income statement into the retained earnings (the permanent account in the balance sheet) at the end of a fiscal year. That is items in the income statement is debited, and the retained earnings account is credited.
The revenue and expense accounts must have a zero balance at the end of the fiscal year because those accounts are bound to defined periods of time and are not carried over to the future. On the other hand, permanent accounts hold activities beyond the current accounting period. This is why the accounts in the temporary accounts are not left to fade away and are put in a ledger that is not time-bound.
A closed account is different from a closed to new account. The latter is an investment vehicle that is operational but does not accept new investors. This is applicable to hedge funds, mutual funds, and other professionally managed pooled investment vehicles.