To better understand how closing entries work in practice, let’s follow a complete example for SmartTech Solutions, a small consulting firm, at the end of their fiscal of your refund year on December 31, 2024. Answer the following questions on closing entries and rate your confidence to check your answer. Instead,  as a form of distribution of a firm’s accumulated earnings, dividends are treated as a distribution of equity of the business.

How to close an income summary account?

Closing entries are journal entries made at the end of an accounting period, that transfer temporary account balances into a permanent account. The income summary is used to transfer the balances of temporary accounts to retained earnings, which is a permanent account on the balance sheet. Permanent accounts, such as asset, liability, and equity accounts, remain unaffected by closing entries.

How are closing entries posted in the general ledger?

Closing entries represent a critical step in the accounting cycle that ensures financial accuracy and proper period separation. Closing entries are journal entries made at the end of an accounting period to transfer balances from temporary accounts to permanent accounts. They represent a critical final step in the accounting cycle that ensures your books are properly prepared for the next accounting period by adjusting the account balance of temporary accounts. Closing entries have a direct impact on the balance sheet, as they transfer temporary account balances to permanent accounts. Closing entries, also called closing journal entries, are entries made at the end of an accounting period to zero out all temporary accounts and transfer their balances to permanent accounts. In other words, the temporary accounts are closed or reset at the end of the year.

From the Deskera “Financial Year Closing” tab, you can easily choose the duration of your accounting closing period and the type of permanent account you’ll be closing your books to. Now, the income summary account has a zero balance, whereas net income for the year ended appears as an increase (or credit) of $14,750. Now that we know the basics of closing entries, in theory, let’s go over the step-by-step process of the entire closing procedure through a practical business example. Thus, the income summary temporarily holds only revenue and expense balances. After most of the cycle is completed and financial statements are generated, there’s one last step in the process known as closing your books.

Example of Closing Entries

Book a 30-minute call to see how our intelligent software can give you more insights and control over your data and reporting. Now, if you’re new to accounting, you probably have a ton of questions. Picture yourself in these situations – whether you’re running a software company, a manufacturing firm, a retail business, a freelance design studio, or a service company. This means checking that all sales, returns, and adjustments are documented accurately.

Understanding Closing Entries

The main change from an adjusted trial balance is revenues, expenses, and dividends are all zero and their balances have been rolled into retained earnings. We do not need to show accounts with zero balances on the trial balances. The closing entries are the journal entry form of the Statement of Retained Earnings.

Lastly, if we’re dealing with a company that distributes dividends, we have to transfer these dividends directly to retained earnings. In other words, they represent the long-standing finances of your business. If you’re ready to simplify your closing process and gain more control over your financials, take a look at what Xenett has to offer at xenett.com.

While they tend to be similar and repetitive, it is worth having a good understanding of what entries are being made and why they are being made. Download our data sheet to learn how you can manage complex vendor and customer rebates and commission reporting at scale. Download our data sheet to learn how to automate your reconciliations for increased accuracy, speed and control. Solutions like SolveXia can transform days of manual closing work into an efficient, accurate process that takes just hours to complete.

HighRadius has a comprehensive Record to Report suite that revolutionizes your accounting processes, making them more efficient and accurate. At the core of this suite is the Financial Close Management solution, which simplifies and accelerates financial close activities, ensuring compliance and reducing errors. Once all of the temporary accounts have been closed, review the journal entries to ensure that they are accurate and complete. First, you are going to start by identifying the temporary accounts that need to be closed. As we mentioned, these include revenue, expense, and dividend accounts. These entries reset all temporary accounts to zero and transfer their net effects to the permanent retained earnings account.

If your goal is to achieve smoother, faster, and more accurate closing entries, integrating an advanced tool with QuickBooks could be the next step. When multiple people are involved in the closing process, this tool keeps everyone aligned with task and file management features. For instance, if your Sales Revenue account shows $100,000, that’s the amount you will close. I’ve helped businesses streamline their closing process for years, and I know exactly where things can get tricky. Or maybe you’re tired of going through confusing financial entries, wondering, “Am I getting this right?

• Closing all temporary accounts to the income summary account leaves an audit trail for accountants to follow.
• Without closing entries, these accounts would continuously accumulate balances from period to period, making it impossible to accurately measure performance for each distinct accounting period.
• The balances of these accounts are eventually used to construct the income statement at the end of the fiscal year.
• HighRadius stands out as a challenger by delivering practical, results-driven AI for Record-to-Report (R2R) processes.
• It’s important to carefully follow each step of the closing process in order to properly close the books at the end of an accounting period.

Retained earnings represent the amount your business owns after paying expenses and dividends for a specific time period. In the next accounting period, these accounts usually (but not always) start with a non-zero balance. All balance sheet accounts are examples of permanent or real accounts.

• As you will see later, Income Summary is eventually closed to capital.
• If your goal is to achieve smoother, faster, and more accurate closing entries, integrating an advanced tool with QuickBooks could be the next step.
• Temporary accounts include all revenue and expense accounts, and also withdrawal accounts of owner/s in the case of sole proprietorships and partnerships (dividends for corporations).
• You can find this by taking a look at the trial balance or income statement in your accounting system.

After recording the journal entry, it’s important to confirm that the revenue account balances are now zero. Temporary account balances can be shifted directly to the retained earnings account or an intermediate account known as the income summary account. Temporary accounts are used to record accounting activity during a specific period. All revenue and expense accounts must end with a zero balance because they’re reported in defined periods. A hundred dollars in revenue this year doesn’t count as $100 in revenue for next year even if the company retained the funds for use in the next 12 months.

Inputting a closing entry resets the temporary account balances to zero. The accounting cycle involves several steps to manage and report financial data, starting with recording transactions and ending with preparing financial statements. These entries transfer balances from temporary accounts—such as revenues, expenses, and dividends—into permanent accounts like retained earnings. In accounting, closing entries reset all the temporary accounts to zero and transfer their net balances to permanent accounts. This process occurs after all regular transactions have been recorded and adjusting entries have been made for the accounting period.

Each example will show you how to handle the closing process and, ultimately, make your transactions cleaner and easier to interpret for next year. If you don’t close these records, your income from last period will mix in with the current period. 🌟 I’ll share some real-world examples so you see how to apply these steps in any business. HighRadius stands out as a challenger by delivering practical, results-driven AI for Record-to-Report (R2R) processes. With 200+ LiveCube agents automating over 60% of close tasks and real-time anomaly detection powered by 15+ ML models, it delivers continuous close and guaranteed outcomes—cutting through the AI hype. On track for 90% automation by 2027, HighRadius is driving toward full finance autonomy.