Closing entries are the last journal entries of the accounting cycle and the most mechanical. They are also where students lose marks for small, avoidable reasons: the wrong account gets closed, or dividends get routed through Income Summary. This post covers the four closing entries in order, works a full example, and ends with the post-closing trial balance that proves you did it right.
Quick answer: Closing entries are journal entries made at the end of an accounting period to reset temporary accounts (revenues, expenses and dividends) to zero and move net income into Retained Earnings. There are four of them: close revenues, close expenses, close Income Summary and close Dividends.
Why Accounts Get Closed
Some accounts measure a period: revenues, expenses and dividends. They answer "how much this year?", so each one must start next year at zero. These are temporary (nominal) accounts. Everything on the balance sheet is permanent (real): the cash you have on December 31 is still there on January 1.
Closing does two jobs at once. It resets the temporary accounts to zero, and it moves the year's net income and dividends into Retained Earnings, the permanent equity account they actually belong to. Until closing is done, the Retained Earnings balance in the ledger is still last year's opening figure.
Which accounts are closed?
| Temporary accounts (closed) | Permanent accounts (not closed) |
|---|---|
| Revenues | Assets, including contra assets such as Accumulated Depreciation |
| Expenses | Liabilities |
| Dividends (Drawings for a sole proprietor) | Common Stock and Retained Earnings |
| Income Summary | Owner's Capital (sole proprietorship) |
A quick test: if the account appears on the income statement or measures distributions to owners, it is closed. If it appears on the balance sheet, it carries forward.
The Four Closing Entries
- Close revenues: debit each revenue account for its balance and credit Income Summary for the total.
- Close expenses: debit Income Summary for the total and credit each expense account for its balance.
- Close Income Summary: its balance is now net income (a credit balance) or net loss (a debit balance). Move it to Retained Earnings.
- Close Dividends: debit Retained Earnings and credit Dividends. This one goes directly to Retained Earnings, because dividends are a distribution of profit, not an expense.
Income Summary is a clearing account that exists only during closing. Its balance after entry 2 should equal the net income on your income statement. If it does not, you have missed an account.
Worked Example: Pinecrest Tutoring, December 31
Pinecrest's adjusted trial balance includes these temporary accounts, and a Retained Earnings balance of $22,000 carried from the start of the year:
| Account | Debit | Credit |
|---|---|---|
| Service Revenue | 84,000 | |
| Interest Revenue | 600 | |
| Salaries Expense | 38,500 | |
| Rent Expense | 12,000 | |
| Utilities Expense | 3,100 | |
| Depreciation Expense | 4,400 | |
| Supplies Expense | 1,900 | |
| Dividends | 9,000 |
Entry 1: close revenues
| Account | Debit | Credit |
|---|---|---|
| Service Revenue | 84,000 | |
| Interest Revenue | 600 | |
| Income Summary | 84,600 |
Entry 2: close expenses
| Account | Debit | Credit |
|---|---|---|
| Income Summary | 59,900 | |
| Salaries Expense | 38,500 | |
| Rent Expense | 12,000 | |
| Utilities Expense | 3,100 | |
| Depreciation Expense | 4,400 | |
| Supplies Expense | 1,900 |
Income Summary now has a credit balance of 84,600 − 59,900 = $24,700, which is net income.
Entry 3: close Income Summary
| Account | Debit | Credit |
|---|---|---|
| Income Summary | 24,700 | |
| Retained Earnings | 24,700 |
Entry 4: close Dividends
| Account | Debit | Credit |
|---|---|---|
| Retained Earnings | 9,000 | |
| Dividends | 9,000 |
Retained Earnings is now 22,000 + 24,700 − 9,000 = $37,700, exactly the ending balance on the statement of retained earnings. That match is your proof.
If the Company Made a Loss
When expenses exceed revenues, Income Summary ends entry 2 with a debit balance. Entry 3 reverses direction: debit Retained Earnings, credit Income Summary. The other three entries do not change.
Sole Proprietorships Use Different Names
A sole proprietorship has no Retained Earnings and pays no dividends. Income Summary closes to Owner's Capital, and Owner's Drawings closes directly to Owner's Capital. The mechanics are identical; only the account names change. Read the question to see which kind of entity you are dealing with.
The Post-Closing Trial Balance
After closing, prepare one more trial balance. It should contain only permanent accounts: assets, liabilities and equity, with Retained Earnings at its new balance. Any revenue, expense or dividend account that still shows a balance has been missed. This is also the trial balance that opens the next period.
Closing Entries vs Adjusting Entries
| Adjusting entries | Closing entries | |
|---|---|---|
| When | End of period, before the financial statements | End of period, after the financial statements |
| Purpose | Record revenue and expenses in the correct period | Reset temporary accounts to zero for the next period |
| Accounts touched | One income statement account and one balance sheet account | Temporary accounts, Income Summary and Retained Earnings |
| Effect on net income | Changes it | None; it only moves it into Retained Earnings |
For the five types of period-end adjustments, see adjusting entries with examples.
Common closing entry mistakes
- Closing Dividends to Income Summary. That makes Income Summary's balance differ from net income. Dividends always close straight to Retained Earnings.
- Closing permanent accounts. Accumulated Depreciation, Unearned Revenue and Allowance for Doubtful Accounts sit in the same part of the trial balance as revenues and expenses, but they are balance sheet accounts. They are never closed.
- Closing from the unadjusted trial balance. Closing comes after adjusting entries. Close from the adjusted trial balance, or this year's accruals will leak into next year. Our guide to the five types of adjusting entries covers the step before this one.
- Getting the direction of entry 3 wrong for a loss. A loss decreases Retained Earnings, so it is a debit to Retained Earnings.
- Forgetting contra-revenue accounts. Sales Returns and Allowances and Sales Discounts have debit balances. They close with the expenses, by crediting them.
Closing entries tie the whole cycle together: transactions, adjustments, statements, then the reset. Work through a complete cycle on Accountely's accounting cycle challenges, then check your adjusted figures on a trial balance challenge. Each one gives line-by-line feedback before you move on.
Frequently Asked Questions About Closing Entries
What are closing entries?
Closing entries are the journal entries recorded at the end of an accounting period to bring revenue, expense and dividend balances to zero and transfer the period's net income or loss to Retained Earnings.
Which accounts are closed at the end of the period?
Temporary accounts: revenues, expenses, dividends (or drawings) and Income Summary. Assets, liabilities and equity accounts such as Retained Earnings are permanent and are not closed.
What is the Income Summary account?
Income Summary is a temporary clearing account used only during closing. Revenues and expenses are closed into it, its balance equals net income or net loss, and it is then closed to Retained Earnings, leaving a zero balance.
Is the Income Summary account required?
No. Many businesses close revenues and expenses directly to Retained Earnings. Textbooks use Income Summary because it shows net income in one place before it is transferred.
What appears on the post-closing trial balance?
Only permanent accounts: assets, liabilities and equity. Every revenue, expense, dividend and Income Summary account should show a zero balance.