Closing Entries
Journal entries that transfer temporary account balances to permanent accounts at year-end.
Definition
Closing entries transfer balances from temporary accounts (revenue, expenses, dividends) to permanent accounts (retained earnings) at the end of an accounting period. This resets temporary accounts to zero for the next period while preserving the cumulative balance in retained earnings.
The process: close revenue to income summary, close expenses to income summary, close income summary (net income) to retained earnings, close dividends to retained earnings. After closing entries, only balance sheet accounts remain open.
Why It Matters
Closing entries separate each period's results, allowing clean measurement of next period's performance. Without closing entries, revenue and expense accounts would accumulate balances indefinitely, making it impossible to track periodic performance.
This process is typically done annually, though some businesses close monthly or quarterly for internal reporting. Accounting software often automates closing entries.
Examples
- 1
Close $500,000 revenue: Debit Revenue $500,000, Credit Income Summary $500,000.
- 2
Close $400,000 expenses: Debit Income Summary $400,000, Credit Expense accounts $400,000.
- 3
Close net income $100,000: Debit Income Summary $100,000, Credit Retained Earnings $100,000.
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