At the end of a period, all accounts are prepared for the next period. It is important to distinguish between permanent and temporary accounts. Balance sheet accounts (ie, assets, liabilities, and equity) have a continuing nature; thus, they are not closed after each period and that's why they are called permanent accounts.

They are not closed each period.

Their balances are carried forward into the next period.

Permanent accounts are also called real accounts .

At the end of a period, amounts in revenue, expense, and distribution accounts are transferred to Retained Earnings.

Accordingly, the revenue, expense, and distribution accounts must have zero balances at the end of one accounting period (after closing the books) and at the beginning of the following period.

These are mostly income statement accounts, except for a distribution account that is equity statement account. Temporary accounts are also called nominal accounts .

closing the accounts or closing the books .

Based on the five transactions described above, we can now prepare the financial statements for the period.

Recall that there are four general-purpose financial statements: