Closing Entry

A closing entry is a journal entry dated at the end of a reporting period that transfers the balance of a temporary account into equity, either directly or through an income summary account the same close empties, leaving every temporary account at zero so the next period measures only its own activity. The balance it moves was already final before the entry was written.

The destination is where short definitions get loose. It is equity, reached directly or by way of income summary, and never whichever permanent account happens to be nearby. Cash, receivables and payables are permanent accounts, and no closing entry touches one. Which accounts are temporary, and why, is in temporary accounting accounts.

The Four Closing Entries, in Order

Close the revenue accounts. Each revenue account carries a credit balance, so each one is debited by the amount of that balance and income summary is credited for the total. A gain account closes here on the same side. Income summary is a temporary account opened inside the close purely to collect the period’s result.

Close the expense accounts. Each carries a debit balance, so each one is credited by its balance and income summary is debited for the total. A loss account closes here. Income summary then holds revenue less expense: a credit balance on a profitable period, a debit balance on a loss.

Close income summary to equity. The balance moves to retained earnings in a corporation, or to the owner’s capital account in a sole proprietorship or partnership, and income summary is emptied by that same entry.

Close the distribution account to that same equity account. A corporation’s dividends declared account, or a proprietor’s drawing account, goes directly to equity and never through income summary. The reason is definitional. Comprehensive income is the change in equity from nonowner sources, and it excludes distributions to owners (FASB Concepts Statement No. 8, Chapter 4, paragraph E75). A distribution reduces equity without ever belonging to the period’s result.

The fourth entry exists only where the period had a distribution, so a period with none is closed in three.

A Worked Example

Say a corporation reaches its year end with one revenue account, three expense accounts and a dividend declared during the year.

Service revenue          61,000
    Income summary                61,000

Income summary           47,000
    Salaries expense              34,000
    Rent expense                   9,000
    Insurance expense              4,000

Income summary           14,000
    Retained earnings             14,000

Retained earnings         6,000
    Dividends declared             6,000

Once those are posted, service revenue, the three expense accounts, income summary and dividends declared all stand at zero, and retained earnings has moved by the period’s profit less the dividend.

Closing Entry or Adjusting Entry

An adjusting entry changes what the period reports. A closing entry changes nothing the period reports, and only moves an already-final balance into equity.

That one difference fixes their order. Adjusting entries come first, because the statements are built from the balances they leave on the adjusted trial balance, and the test that identifies one is in adjusting entries. Closing entries come last, and the evidence they ran is a post-closing trial balance with no temporary account left on it. Where both sit in the wider sequence is in accounting cycle.

What Closing Means Inside a Firm

In a firm closing client books, these entries are what end a period as a working file. Up to the moment those entries are posted, a late adjustment is an ordinary journal entry. Once they are posted and the statements have gone out, a correction to the closed period becomes a different piece of work with its own reporting treatment, covered in post-closing trial balance.

So the review point sits before the statements go out. A preparer books the closing entries, and someone senior confirms the balances being closed and reads the resulting listing before the period is locked. How that sign-off is sequenced across a portfolio of client books is in the month-end close checklist.

Common Questions

Accountably places trained offshore accountants inside US CPA and EA firms, and a firm can hand one period of its own closing work to a placed accountant under a trial task while its own reviewer keeps the sign-off.