Zero balance

Definition

Zero balance occurs when an account has no remaining funds or balance at the end of an accounting period. It is often achieved through the process of making closing entries to reset temporary accounts to zero.

5 Must Know Facts For Your Next Test

1. Zero balance is achieved by transferring the balances of temporary accounts to permanent accounts.
2. Temporary accounts include revenue, expenses, and dividends which are closed at the end of each accounting period.
3. Closing entries are used to ensure that these temporary accounts have a zero balance at the start of the next period.
4. A zero balance in revenue and expense accounts allows for accurate measurement of income for each new period.
5. The process of closing entries helps in preparing financial statements by ensuring correctness and completeness.

Review Questions

Related terms

Closing Entries:

Closing entries are journal entries made at the end of an accounting period to transfer balances from temporary accounts to permanent ones.

Temporary Accounts:

Temporary accounts include revenue, expense, and dividend accounts that are closed at the end of every accounting period.

Permanent Accounts:

Permanent accounts include asset, liability, and equity accounts that carry their balances into future periods without being reset.