Closing entries are made at the end of each accounting period to reset temporary accounts (revenue, expenses, dividends) to zero. Their balances are transferred to retained earnings — a permanent equity account.
For example, if revenue was $100,000 and expenses were $70,000, closing entries would zero out both accounts and transfer the $30,000 net income to retained earnings.
This process ensures that each new accounting period starts fresh with clean temporary accounts, while the cumulative profit or loss is preserved in the balance sheet through retained earnings.