🎓 Prepared by students from Boğaziçi University

What are Closing Entries?

Closing entries are the journal entries made at the end of an accounting period to transfer balances from temporary accounts into permanent equity accounts. They reset revenue, expense, and dividend accounts to zero so the next period starts fresh.

Short answer

Closing entries zero out temporary accounts (revenues, expenses, dividends) at period-end and transfer net income into retained earnings, preparing the books for the next accounting period.

The Closing Entries Process

1
Close Revenue Accounts
Debit each revenue account; credit Income Summary.
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2
Close Expense Accounts
Credit each expense account; debit Income Summary.
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3
Close Income Summary
Transfer the net balance (net income or loss) to Retained Earnings.
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4
Close Dividends
Debit Retained Earnings; credit the Dividends account.

Step-by-step worked examples

A company has Revenue of $50,000 and Expenses of $30,000 for the year. Record the closing entries for revenue and expenses.

Close revenue: Debit Revenue $50,000; Credit Income Summary $50,000
Close expenses: Debit Income Summary $30,000; Credit Expenses $30,000
Income Summary now has a $20,000 credit balance (net income)

Following the previous example, close the $20,000 Income Summary balance to Retained Earnings.

Income Summary has a $20,000 credit balance (net income)
Entry: Debit Income Summary $20,000; Credit Retained Earnings $20,000
Income Summary is now zero

The company paid $5,000 in dividends during the year. Record the closing entry for dividends.

Dividends account has a $5,000 debit balance
Entry: Debit Retained Earnings $5,000; Credit Dividends $5,000
Retained Earnings' net change for the year = +$20,000 − $5,000 = $15,000

Flashcards

Quick quiz

Q1.Which accounts are closed at the end of a period?

Correct answer: B. Temporary accounts — revenue, expense, dividends — are closed each period.

Q2.Revenue of $40,000 is closed. What is the entry?

Correct answer: B. Revenue has a credit balance, so closing it means debiting Revenue and crediting Income Summary.

Q3.Where does the Income Summary balance ultimately go?

Correct answer: C. Net income or loss in Income Summary is transferred to Retained Earnings.

Q4.Why are dividends closed directly to Retained Earnings instead of through Income Summary?

Correct answer: B. Dividends aren't an expense on the income statement; they reduce equity directly.

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Common mistakes

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Closing asset and liability accounts. — Correct: Only temporary accounts (revenue, expense, dividends) are closed — permanent accounts carry forward.

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Closing dividends through Income Summary. — Correct: Dividends close directly to Retained Earnings, not through Income Summary.

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Forgetting Income Summary should end at zero. — Correct: After all closing entries, Income Summary must have a zero balance.

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Treating closing entries as optional. — Correct: They're required each period to keep temporary accounts from accumulating across years.

FAQ

What is the definition of closing entries?

Journal entries made at period-end to zero out temporary accounts and update Retained Earnings.

What is the formula for closing entries?

There's no formula — it's a 4-step process: close revenues, close expenses, close Income Summary, close dividends.

What are examples of closing entries?

Debiting Revenue and crediting Income Summary; debiting Income Summary and crediting Retained Earnings.

How to calculate the impact of closing entries?

Net income (revenues minus expenses) minus dividends equals the change in Retained Earnings for the period.