A closing entry is a journal entry made at the end of an accounting period that transfers the balances of temporary accounts — revenue, expense, and dividend accounts — to retained earnings, a permanent equity account.
After closing, all temporary accounts have zero balances, ready for the next period. The closing process is what separates one period’s results from the next. Without it, revenue and expense accounts would accumulate across periods and the income statement would show lifetime totals instead of periodic performance.
The closing sequence follows four steps:
- Close revenue to income summary. Debit each revenue account for its balance and credit the income summary account. This zeroes out revenue.
- Close expenses to income summary. Credit each expense account for its balance and debit the income summary account. This zeroes out expenses.
- Close income summary to retained earnings. If income summary has a credit balance (net income), debit income summary and credit retained earnings. If it has a debit balance (net loss), the entry reverses.
- Close dividends to retained earnings. Credit the dividends account and debit retained earnings. Dividends bypass income summary because they aren’t an expense — they’re a distribution of earnings to owners.
After these four steps, the only accounts with balances are permanent accounts: assets, liabilities, and equity. The books are ready for the next period.
Related terms
- Journal — the record where entries, including closing entries, are first recorded.
- Retained earnings — the equity account that receives the net effect of closing entries.
- Account — the individual records (temporary and permanent) affected by the closing process.
- Income statement — the financial statement built from the temporary accounts that closing entries reset.