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Closing Entries

Closing entries transfer temporary account balances to permanent accounts at year-end, resetting revenue and expense accounts to zero for the new period.

Purpose of Closing Entries​

  1. Reset temporary accounts to zero
  2. Transfer net income to retained earnings/owner's equity
  3. Prepare for new period with clean slate
  4. Separate periods clearly

Temporary vs. Permanent Accounts​

Temporary Accounts (Close Annually)​

  • Revenue accounts
  • Expense accounts
  • Owner's draws/dividends

Permanent Accounts (Never Close)​

  • Assets
  • Liabilities
  • Owner's capital/retained earnings

The Closing Process​

Step 1: Close Revenue Accounts​

Transfer all revenue to Income Summary:

Debit: Sales Revenue           $100,000
Debit: Service Revenue          $50,000
Credit: Income Summary                 $150,000

Step 2: Close Expense Accounts​

Transfer all expenses to Income Summary:

Debit: Income Summary           $90,000
Credit: Wage Expense                    $50,000
Credit: Rent Expense                    $20,000
Credit: Utilities Expense               $10,000
Credit: Other Expenses                  $10,000

Step 3: Close Income Summary​

Transfer net income to equity:

Debit: Income Summary           $60,000
Credit: Retained Earnings               $60,000

(Revenue $150,000 - Expenses $90,000 = Net Income $60,000)

Step 4: Close Draws/Dividends​

Transfer owner withdrawals:

Debit: Retained Earnings        $20,000
Credit: Owner's Draws                   $20,000

After Closing​

  • All temporary accounts have zero balance
  • Ready for new fiscal period
  • Net income added to equity
  • Post-closing trial balance prepared

Next Steps​

You've completed Part 4! Ready to learn about financial reporting? Continue to Part 5: Reporting & Analysis.