Explain why and how companies prepare closing entries and understand the quality of earnings.

- Closing entries transfer the effects of revenues, expenses, and dividends declared to the shareholders' equity account, Retained Earnings, and clear the balances in revenues, expenses, and dividends declared (reduce their balances to zero) so that they are ready to accumulate the business activities of the next accounting period.

- To close the accounts, companies make a series of journal entries, dated as of the last day of the accounting period.