Closed Account

What is a closed account?

A closed account is any account that has been deactivated or terminated by the account holder or a counterparty. Once an account is closed, account holders can’t add additional credits or debits. This term often refers to checking or savings accounts, credit cards, auto loans, or brokerage accounts.  

In accounting, a closed account, sometimes called a closed entry, refers to the annual process of shifting data from temporary accounts on the income statement to permanent accounts on the balance sheet to begin the new financial year with a zero balance. 

Businesses can use accounting software to automate financial management processes surrounding closed accounts, ensuring accurate records and increasing operational efficiency across recurring processes, like invoicing and reconciliation.

Although accounting products vary in complexity and functionality, accounting software can include features for payroll processing, invoicing, bill and expense management, and financial statements and reporting. 

Causes of closed accounts

Sometimes an account holder opts to close their account. Alternatively, a financial institution may terminate it. Some reasons a bank may close an account include: 

• Lack of regular activity. If a bank sees an account holder has made few or no transactions over a few years, it may decide to close the account. A bank usually gives users three to five years to recommence activity before pulling the plug. Additionally, it usually contacts the account holder before closing the account. 

• Zero balance. Depending on the financial institution’s rules, an account may be closed if it remains at zero balance for an extended period of time. 

• Suspicious activity. If a bank suspects problematic activity, including identity theft, it may shut down the account to prevent further fraudulence. If a bank detects any unusual activity from the account holder (like large transfers or withdrawals), it may raise a red flag and lead to a closed account.  

• Overdrafts. When an account holder writes a check or makes a debit card payment without enough money in their account to cover it, the negative balance that results is called an overdraft. A bank will likely wait 30-60 days or until the account holder has enough money in their account to pay for the overdraft and any overdraft fees before shutting the account down. 

• Exceeding transfer limits. Financial institutions typically create rules around how many transfers an account holder can make between accounts, such as their checking and savings accounts. The bank may close down an account if the holder exceeds their predetermined limit.  

Closed account vs. closed to new accounts

A closed account sounds similar to the term closed to new accounts. The main difference is that a closed account refers to an account typically held by a single user, whereas the latter term describes an investment vehicle. 

Closed to new accounts refers to a fund or investment vehicle that is fully functional but no longer accepting new investors. This term applies to hedge funds, mutual funds, and professionally managed pooled investment vehicles. Closed to new accounts status is most commonly instated to limit the size of the fund. Larger funds (related to total assets) may run into regulatory hurdles and have extra costs attached to them.