Closing Entries

Closing Entries

Journal entries made at the end of an accounting period to transfer temporary account balances (revenues, expenses, and dividends or withdrawals) to permanent accounts, resetting income and expense accounts to zero for the next period.

For example, at fiscal year-end, a company with revenues of $850,000, expenses of $650,000, and dividends of $50,000 would make closing entries to transfer the revenue and expense balances to Income Summary, transfer the $200,000 net income from Income Summary to Retained Earnings, and transfer the $50,000 dividends balance to Retained Earnings.

Closing entries represent a critical step in the accounting cycle, occurring after all adjusting entries but before preparing the post-closing trial balance. The process typically follows four steps: closing revenues to Income Summary, closing expenses to Income Summary, closing Income Summary to Retained Earnings (or owner’s capital in non-corporate entities), and closing dividends or withdrawals to Retained Earnings or owner’s capital. These entries formally segregate the financial results of different accounting periods, maintaining the integrity of period-specific reporting while carrying forward cumulative balances in permanent accounts (assets, liabilities, and equity). Modern accounting software often automates this process while maintaining the conceptual distinction between temporary and permanent accounts.