Closing Entries
Closing entries reset temporary accounts to zero at period end and transfer net income to retained earnings. Master the closing process for revenue, expenses, and dividends.
Closing entries reset temporary accounts to zero at period end and transfer net income to retained earnings. Master the closing process for revenue, expenses, and dividends.
Key Concepts
Study Tips
- ✓Remember: temporary accounts are closed; permanent accounts are not
- ✓Close revenues, then expenses, then income summary, then dividends
- ✓Income Summary is a temporary holding account for the closing process
- ✓After closing, only balance sheet accounts should have balances
Common Mistakes to Avoid
Common errors include closing permanent accounts (never do this!) or forgetting to close dividends. Remember the order: (1) close revenues to Income Summary, (2) close expenses to Income Summary, (3) close Income Summary to Retained Earnings, (4) close Dividends to Retained Earnings.
Related Resources
Closing Entries FAQs
Common questions about closing entries
Temporary accounts (revenues, expenses, dividends) are closed to zero at period end. Permanent accounts (assets, liabilities, equity) carry their balances forward to the next period.
Income Summary is a temporary account used only during the closing process. Revenues and expenses are closed to it, then its balance (net income or loss) is closed to Retained Earnings.
Closing entries reset temporary accounts to zero so the next period can accumulate fresh revenue and expense data. They also transfer net income to Retained Earnings, updating the equity section of the balance sheet.
Four steps: (1) Close Revenue accounts to Income Summary (debit Revenue, credit Income Summary). (2) Close Expense accounts to Income Summary (debit Income Summary, credit each Expense). (3) Close Income Summary to Retained Earnings. (4) Close Dividends to Retained Earnings (debit RE, credit Dividends). After all four steps, only permanent accounts have balances.