Preparing and Analyzing Closing Entries 1. Prepare the closing entries for Sparrow at December 31. If an amount box does not require an entry, leave it blank. 2. How does the closing process affect retained earnings? The closing process temporary account balances to retained earnings. If the accounts were not closed, and the accounting equation would not be in balance. In addition, these accounts would accumulate, making it difficult to identify when the effect of a business activity occurred. 1. Prepare the closing entries for Sparrow at December 31. If an amount box does not require an entry, leave it blank