Journal Entries for Closing Entries

Quick Answer: Closing entries transfer the balances of temporary accounts (revenues, expenses, and dividends) to permanent accounts at the end of an accounting period. The process involves four key steps: close revenue accounts to Income Summary, close expense accounts to Income Summary, close Income Summary to Retained Earnings, and close Dividends to Retained Earnings. These entries zero out temporary accounts so the next period starts fresh.

Closing entries are among the most important journal entries in the accounting cycle. They mark the final step before a company prepares its financial statements for a new period. Without proper closing entries, revenue and expense balances would accumulate indefinitely, making it impossible to measure the performance of any single period.

This guide walks through each closing entry with detailed journal entry examples, explains the underlying mechanics, and highlights common mistakes to avoid.

What Are Closing Entries?

Closing entries are journal entries made at the end of an accounting period to reset temporary (nominal) account balances to zero. Temporary accounts include all revenue accounts, expense accounts, and the dividends (or withdrawals) account. These accounts track activity for a specific period and must be cleared before the next period begins.

Permanent (real) accounts — such as Cash, Accounts Receivable, and Retained Earnings — are not closed. Their balances carry forward from one period to the next.

The vehicle for transferring temporary account balances is the Income Summary account, a temporary holding account that aggregates all revenues and expenses before the net result is posted to Retained Earnings.

The Four Closing Entries

The closing process follows a strict sequence. Each entry builds on the previous one, and skipping a step will produce an incorrect Retained Earnings balance.

1. Close Revenue Accounts to Income Summary

Revenue accounts normally carry credit balances. To close them, you debit each revenue account for its full balance and credit Income Summary for the total of all revenues.

Assume a company has the following revenue balances at period end:

• Sales Revenue: $120,000 (credit)
• Interest Revenue: $3,500 (credit)

After this entry, both revenue accounts have zero balances, and Income Summary holds a credit of $123,500.

2. Close Expense Accounts to Income Summary

Expense accounts normally carry debit balances. To close them, you credit each expense account for its balance and debit Income Summary for the total of all expenses.

Assume the following expense balances:

• Cost of Goods Sold: $68,000 (debit)
• Salaries Expense: $28,000 (debit)
• Rent Expense: $12,000 (debit)
• Utilities Expense: $4,200 (debit)
• Depreciation Expense: $5,800 (debit)

After this entry, all expense accounts are zero. Income Summary now shows a net credit balance of $5,500 ($123,500 − $118,000), which equals net income.

3. Close Income Summary to Retained Earnings

The Income Summary balance represents the net income (credit balance) or net loss (debit balance) for the period. This balance transfers to Retained Earnings.

If the company had incurred a net loss (say $3,000), the entry would be reversed:

After this entry, Income Summary is zero and Retained Earnings reflects the period's profit or loss.

4. Close Dividends to Retained Earnings

The Dividends (or Drawings) account is a temporary contra-equity account with a normal debit balance. It is closed directly to Retained Earnings — not through Income Summary. This is a critical distinction: dividends are not an expense and do not affect net income.

After this entry, the Dividends account is zero and Retained Earnings reflects the net income less dividends for the period. In our example, ending Retained Earnings increases by $3,500 ($5,500 net income − $2,000 dividends).

Closing Entries and the Accounting Cycle

Closing entries occur after the adjusted trial balance is prepared and financial statements have been generated. They are the seventh step in the standard accounting cycle:

1. Identify and analyze transactions
2. Record journal entries
3. Post to the general ledger
4. Prepare an unadjusted trial balance
5. Record adjusting entries
6. Prepare an adjusted trial balance and financial statements
7. Record closing entries
8. Prepare a post-closing trial balance

The post-closing trial balance verifies that all temporary accounts have been zeroed out and only permanent accounts remain with non-zero balances. It is an essential validation step that catches errors in the closing process.

Closing Entries vs. Adjusting Entries

It is common to confuse closing entries with adjusting entries, but they serve different purposes:

Feature	Adjusting Entries	Closing Entries
Purpose	Recognize accrued and deferred items	Reset temporary accounts to zero
Timing	Before financial statements	After financial statements
Accounts Affected	Both permanent and temporary	Temporary accounts only
Frequency	End of each period	End of each period
Impact on Retained Earnings	Indirect (through net income)	Direct (Income Summary to RE)

Adjusting entries ensure that revenues and expenses are recognized in the correct period. Closing entries ensure those recognized amounts are properly folded into Retained Earnings so the next period starts clean. For a comprehensive overview of all journal entry types, see our guide to journal entries for small business.

Common Mistakes in Closing Entries

Even experienced accountants can make errors during the closing process. Here are the most frequent pitfalls:

• Closing to the wrong account: Dividends must close directly to Retained Earnings, not to Income Summary. Routing dividends through Income Summary would incorrectly reduce net income.
• Omitting an expense or revenue account: If even one account is missed, the Income Summary balance will be wrong, and Retained Earnings will be misstated.
• Reversing debit and credit: Revenue accounts are debited to close (since they carry credit balances). Expense accounts are credited to close (since they carry debit balances). Reversing these produces wrong signs.
• Closing permanent accounts: Asset, liability, and equity accounts (other than Dividends) should never be closed. Doing so destroys cumulative balances.
• Forgetting the post-closing trial balance: Without this check, errors in the closing process can go undetected until the next period.

Automating Closing Entries

Most modern accounting software — QuickBooks, Xero, Sage — automates the closing process. At period end, the software generates closing entries behind the scenes and locks the prior period to prevent further changes. However, understanding the manual process remains important for several reasons:

• You need to verify that the software's closing entries are correct
• Spreadsheet-based or manual bookkeeping systems still require manual closing
• Auditors may request proof that closing entries were properly recorded
• Understanding the mechanics helps diagnose issues when the balance sheet does not tie

If your company still uses manual books or spreadsheets, consider implementing a year-end closing checklist to ensure no steps are missed.

Closing Entries Under IFRS and GAAP

The closing process is fundamentally the same under both IFRS and US GAAP: temporary accounts are closed to equity at period end. The key differences relate to presentation and terminology rather than mechanics:

• Under IFRS, the statement of changes in equity replaces the retained earnings statement, but the closing entries are identical
• US GAAP uses the term "Income Summary" more commonly, while IFRS practice may skip the intermediate account and close directly to Retained Earnings
• Both frameworks require that dividends (or distributions) close directly to equity, not through the income statement

For more on the differences between these frameworks, see our comparison of IFRS vs. local GAAP.

Key Takeaways

• Closing entries zero out temporary accounts (revenues, expenses, dividends) at the end of each accounting period
• The Income Summary account serves as a temporary clearing account that captures net income or net loss
• There are exactly four closing entries: revenues to Income Summary, expenses to Income Summary, Income Summary to Retained Earnings, and Dividends to Retained Earnings
• Dividends are closed directly to Retained Earnings — never through Income Summary
• The post-closing trial balance confirms that all temporary accounts have zero balances
• Understanding manual closing entries is essential even when using automated accounting software