What is the primary purpose of closing entries?

The primary purpose of closing entries is to reset temporary accounts for the next accounting period. Temporary accounts, which include revenues, expenses, gains, and losses, accumulate balances over a specific period—usually a fiscal year or quarter. At the end of that period, these accounts must be closed to ensure that they start with a zero balance in the next period. This process provides a clear delineation between financial performance across different accounting periods.

Closing entries transfer the balances in temporary accounts to a permanent account, typically retained earnings. This ensures that the net income or loss from the closed period is reflected in the equity portion of the balance sheet and separates each period's financial activities for clarity and accurate reporting.

Choices related to adjusting permanent accounts and preparing cash flow statements do not encompass the main function of closing entries. Additionally, increasing sales revenue is not relevant to the purpose of closing entries, as they deal with account balances and financial period transitions rather than ongoing revenue generation.