closing entries
/ KLOH-zing EN-treez /
At the end of a period, after the financial statements are prepared, the books still need to be reset for the year ahead. The revenue and expense accounts are full of this year's activity, and they must be emptied so next year can start fresh, with their combined result handed over to the owners' equity. Closing entries are the journal entries that do this resetting — they zero out the temporary accounts and transfer the net profit or loss into a permanent equity account.
The standard sequence has a few steps. First, close revenues: debit each revenue account to bring it to zero and credit Income Summary. Second, close expenses: credit each expense account to zero it and debit Income Summary. Income Summary now holds the period's net income (or net loss) as a single number. Third, close Income Summary to equity: if there was a 20,000 profit, debit Income Summary 20,000 and credit Retained Earnings 20,000. Fourth, close any dividends or owner withdrawals directly to equity. After all this, every temporary account reads zero.
Closing entries are a defining step of the accounting cycle and the practical expression of the accounting period assumption — chopping continuous business life into comparable yearly slices. In modern accounting software the closing is often triggered with a click, but the logic is identical underneath. The key thing to understand is that closing does not erase information: the detail lives on in past statements and the ledger history. Closing simply clears the temporary scorecards so each new period is measured on its own.
A shop ends the year with Revenue 150,000 and total Expenses 110,000. Closing: debit Revenue 150,000 / credit Income Summary 150,000; debit Income Summary 110,000 / credit Expenses 110,000; then debit Income Summary 40,000 / credit Retained Earnings 40,000. All temporary accounts now sit at zero.
Revenues and expenses funnel through Income Summary, whose net lands in equity.
Closing entries come after the financial statements are prepared, not before — the statements are built from the adjusted trial balance, and closing merely resets the temporary accounts for the next period.