Guides
Closing Entries: What They Are and How to Record Them
Closing entries are journal entries recorded at the end of an accounting period that reset all temporary accounts (revenue, expense, and dividend accounts) to a zero balance and transfer their net effect into a permanent equity account, usually Retained Earnings. They mark the final step of the accounting cycle, run only after the adjusted trial balance is complete, and separate one period’s results from the next.
Businesses post four closing entries: close revenue, close expenses, close the Income Summary account into equity, and close dividends or owner draws. After these entries post, every income statement account starts the new period at zero, and the balance sheet accounts carry forward their ending balances.
Temporary vs Permanent Accounts
Temporary accounts collect activity for a single period and get reset to zero at period end. Permanent accounts carry their ending balance into the next period. Closing entries touch only temporary accounts. This distinction is the reason closing entries exist: without them, a company could not tell one year’s revenue from the next.
Temporary accounts include all revenue accounts, all expense accounts, and the dividends (or owner withdrawals) account. The Income Summary account is also temporary, used only during the closing process. These accounts feed the income statement, which reports performance over a specific span.
Permanent accounts (also called real accounts) include assets, liabilities, and equity accounts such as common stock and retained earnings. Their balances appear on the balance sheet, which reports position at a single point in time. A cash balance of $40,000 on December 31 becomes the January 1 opening balance the next year.
| Feature | Temporary accounts | Permanent accounts |
|---|---|---|
| Also called | Nominal accounts | Real accounts |
| Examples | Revenue, expenses, dividends, Income Summary | Cash, accounts receivable, loans payable, retained earnings |
| Financial statement | Income statement | Balance sheet |
| Reset at period end | Yes, to zero via closing entries | No, balance carries forward |
| Measures | Activity over a period | Position at a point in time |
Why Closing Entries Matter
Closing entries keep each period’s results separate and move net income into permanent equity. Revenue and expense accounts must start every period at zero so the income statement reflects only that period’s activity. The entries also update Retained Earnings, tying the income statement to the balance sheet.
Skipping the close would let balances accumulate across years. A revenue account never reset would show cumulative lifetime sales rather than the current year, making the income statement meaningless for measuring performance.
Closing also moves the period’s profit or loss out of temporary accounts and into Retained Earnings (for corporations) or the owner’s capital account (for sole proprietors and partnerships). This is how equity grows or shrinks based on operating results.
The Income Summary Account
Income Summary is a temporary holding account used only during closing. Revenue and expense balances are routed through it so their net effect (net income or net loss) transfers to Retained Earnings in a single, clean amount. After closing, Income Summary itself is zeroed out and carries no balance onto any financial statement.
The Income Summary balance equals net income for the period. If total revenue is $80,000 and total expenses are $65,000, Income Summary holds a $15,000 credit balance, which is the net income. A net loss would leave a debit balance.
Using Income Summary is optional but common in textbooks and manual systems. Many accounting software packages close revenue and expenses directly to Retained Earnings and skip the intermediate account. The end result is identical either way.
The 4 Closing Entries, Step by Step
The four closing entries run in a fixed order: close revenue, close expenses, close Income Summary to equity, then close dividends. Each entry debits or credits the temporary account to bring it to zero and posts the offsetting amount to Income Summary or Retained Earnings. Below is a worked example for a corporation with $80,000 revenue, $65,000 expenses, and $5,000 in dividends.
- Close revenue accounts. Revenue accounts carry credit balances, so debit each revenue account for its full balance and credit Income Summary for the total. This resets revenue to zero.
- Close expense accounts. Expense accounts carry debit balances, so credit each expense account for its balance and debit Income Summary for the total. This resets expenses to zero.
- Close Income Summary to Retained Earnings. Income Summary now holds net income ($15,000 credit here). Debit Income Summary for $15,000 and credit Retained Earnings for $15,000. A net loss reverses this (credit Income Summary, debit Retained Earnings).
- Close dividends to Retained Earnings. Dividends carry a debit balance. Credit Dividends for $5,000 and debit Retained Earnings for $5,000. Dividends are never routed through Income Summary because they are a distribution, not an expense.
Closing Entries Table
The table below shows the four entries with the debits and credits for the worked example. Note that Retained Earnings nets to a $10,000 increase ($15,000 net income minus $5,000 dividends).
| Step | Entry | Account | Debit | Credit |
|---|---|---|---|---|
| 1 | Close revenue | Revenue | $80,000 | |
| Income Summary | $80,000 | |||
| 2 | Close expenses | Income Summary | $65,000 | |
| Expenses | $65,000 | |||
| 3 | Close Income Summary | Income Summary | $15,000 | |
| Retained Earnings | $15,000 | |||
| 4 | Close dividends | Retained Earnings | $5,000 | |
| Dividends | $5,000 |
For a sole proprietorship or partnership, steps 3 and 4 close to the owner’s capital account and the drawing account instead of Retained Earnings and Dividends, but the mechanics are the same.
Where Closing Entries Fit in the Accounting Cycle
Closing entries are the last recording step of the accounting cycle, performed after adjusting entries and the adjusted trial balance, and before the post-closing trial balance. They follow the same debit-and-credit rules as every other entry. Understanding journal entries and the logic of debits and credits makes the closing process straightforward.
Adjusting entries come first so that revenue and expenses are stated correctly before they are closed. Only the adjusted balances get closed.
After closing, a post-closing trial balance confirms the books are ready for the new period. It should list only permanent accounts (assets, liabilities, and equity, including the updated retained earnings balance), because every temporary account now sits at zero. Total debits should still equal total credits.
Closing Entries FAQ
What are the four closing entries?
The four closing entries are: close revenue accounts to Income Summary, close expense accounts to Income Summary, close Income Summary to Retained Earnings (or owner’s capital), and close dividends or owner draws to Retained Earnings (or capital). Together they reset all temporary accounts to zero and transfer the period’s net result into permanent equity.
Which accounts get closed?
Only temporary accounts get closed: revenue, expenses, dividends (or owner withdrawals), and the Income Summary account. Permanent accounts (assets, liabilities, common stock, and retained earnings) are never closed; their balances carry forward into the next period. Closing zeroes out the temporary accounts so the next period starts fresh.
Is Income Summary required?
No, the Income Summary account is optional. It is a temporary holding account that nets revenue and expenses before transferring the result to Retained Earnings. Many software systems close revenue and expenses directly to Retained Earnings and skip it. The final Retained Earnings balance is identical whether or not Income Summary is used.
Are dividends closed through Income Summary?
No. Dividends (or owner draws) are closed directly to Retained Earnings (or the owner’s capital account), not through Income Summary. Dividends are a distribution of profit to owners, not an expense of running the business, so they do not belong in the calculation of net income that Income Summary represents.
When are closing entries recorded?
Closing entries are recorded at the end of the accounting period, typically the fiscal year end, after all adjusting entries and the adjusted trial balance are complete. They are the final recording step of the accounting cycle. A post-closing trial balance follows to confirm only permanent accounts remain and debits equal credits.
What is the difference between closing entries and adjusting entries?
Adjusting entries update account balances for accruals, deferrals, and estimates before the financial statements are prepared, and they can affect both temporary and permanent accounts. Closing entries come afterward, affect only temporary accounts, and reset them to zero while moving net income into equity. Adjusting entries measure; closing entries reset.
Reviewed by The Ledgerism Editorial Team. Last reviewed: July 2026.