Closing Entries in Accounting: Steps, Examples and Checks

Closing entries are journal entries made at the end of an accounting period. They zero out your temporary accounts (revenue, expenses and dividends) and move their net effect into Retained Earnings, so the new period starts clean. You then run a post-closing trial balance to prove that only balance sheet accounts still carry a balance. This guide walks through the four steps, a worked example with real numbers, the checks that catch mistakes, and what a business owner should ask of whoever does the close.

TL;DR

• Closing entries reset revenue, expense and dividend accounts to zero and roll the result into Retained Earnings. Nothing is deleted; the history stays in the ledger.
• There are four steps: close revenue to Income Summary, close expenses to Income Summary, close Income Summary to Retained Earnings, and close Dividends to Retained Earnings.
• The post-closing trial balance is your proof. If a revenue, expense or dividend account shows a balance, a closing entry was missed.
• Close at least once a year. Many businesses also run a lighter close every month so the numbers are trustworthy when decisions are made.
• If you use accounting software, most of the mechanics are automated, but someone still has to review the result. That review is where errors get caught.

Table of Contents

• What closing entries actually do
• Which accounts get closed
• The four steps of the closing process
• A worked example
• Proving the close: the post-closing trial balance
• When to make closing entries
• Before you close: a pre-close checklist
• Closing entries in accounting software
• Records you need to keep
• Perspective: what we see when businesses close their books
• Getting help with your year-end close
• Common mistakes with closing entries
• FAQ
• Sources

What closing entries actually do

Your books hold two kinds of accounts. Permanent accounts (assets, liabilities and equity) carry their balances forward from one period to the next. Temporary accounts (revenue, expenses and dividends) measure activity for one period only. Closing entries transfer the balances of those temporary accounts into Retained Earnings, which resets them to zero for the start of the next period.

Why bother? Because you want to compare this year with last year. If January's sales were still sitting in the revenue account in December of the following year, you could not tell what the business earned in the new period. The reset is what makes period-to-period comparison possible. Accounting textbooks call this the time period assumption: temporary accounts are temporary only because they collect data for a defined window, usually a month or a year.

What closing entries do not do

A common worry among owners is that closing the books erases history. It does not. A closing entry is a new journal entry that adds lines to the ledger. The full transaction history stays intact and traceable, and the net result of the period lands in equity.

They also do not touch your balance sheet accounts. Cash, accounts receivable, inventory, loans and the like keep their balances. Only the income statement accounts and dividends (or owner draws) are reset.

Which accounts get closed

One wrinkle for owners of sole proprietorships and partnerships: the equity account that receives the net income is typically a capital account rather than Retained Earnings, and withdrawals are closed to that capital account. The mechanics are the same.

The four steps of the closing process

The classic method uses a temporary holding account called Income Summary. The process typically involves four steps: close revenue to Income Summary, close expenses to Income Summary, close Income Summary to Retained Earnings, and close Dividends to Retained Earnings.

1. Close revenue. Debit each revenue account for its full balance and credit Income Summary for the total.
2. Close expenses. Credit each expense account for its balance and debit Income Summary for the total.
3. Close Income Summary. After steps 1 and 2, the Income Summary balance equals net income (a credit balance) or net loss (a debit balance). Move it to Retained Earnings: debit Income Summary and credit Retained Earnings for a profit, the reverse for a loss.
4. Close dividends. Credit the Dividends account and debit Retained Earnings for the amount declared.

Some teams skip Income Summary and close revenue and expenses straight to Retained Earnings. The end result is identical. The Income Summary route simply leaves a cleaner audit trail, because you can see net income as a single figure before it moves into equity.

A worked example

The numbers below are hypothetical, chosen to keep the arithmetic easy. Say a consulting company ends its year with these balances before closing:

Entry 1: close revenue

Entry 2: close expenses

Income Summary now holds a $30,000 credit balance: $180,000 minus $150,000. That is net income.

Entry 3: close Income Summary to Retained Earnings

Entry 4: close dividends

Retained Earnings goes from $50,000 to $70,000 (the opening $50,000, plus $30,000 net income, minus $10,000 in dividends). Revenue, every expense account, Income Summary and Dividends all read zero. That is exactly what you want to see.

Proving the close: the post-closing trial balance

Once the entries are posted, you prepare a post-closing trial balance. It is the final step in the accounting cycle, prepared after the closing entries to confirm that only permanent accounts (assets, liabilities and equity) have non-zero balances. It also confirms that total debits still equal total credits.

What a clean one looks like

In the example above, the post-closing trial balance would list cash, receivables, equipment, payables and any other balance sheet accounts, plus Retained Earnings at $70,000. No revenue. No expenses. No dividends.

What a dirty one tells you

If a temporary account appears with a balance, that is a sign something went wrong in the closing process. It usually means a closing entry was missed or posted to the wrong account. Fix it before you record anything in the new period, as the De Anza College open text on the post-closing trial balance stresses, because an uncorrected error carries straight into the next period's financial statements.

If debits and credits do not match, look for a one-sided entry, a transposed number, or a closing entry that was posted for the wrong amount. Comparing the Income Summary balance to net income on your income statement is the fastest sanity check.

When to make closing entries

The formal answer: at the end of every accounting period. In practice that means one of three rhythms.

• Annually. The minimum for most businesses. Your fiscal year-end close feeds the tax return and the annual financial statements.
• Quarterly. Common for companies with lenders, investors or boards that expect quarterly reporting.
• Monthly. Many growing businesses close each month, though in software this is often a soft close: reconcile, review, lock the period, without posting formal closing journal entries.

If you want the bigger picture of how closing fits into reconciliations, accruals and review, our guide to the financial close process covers it from the finance team's side.

Before you close: a pre-close checklist

Closing entries only reset what is in the ledger. If the ledger is wrong, you lock in the wrong numbers. Before you close a period, work through these:

1. Reconcile every bank and credit card account to the statement ending balance.
2. Review accounts receivable and payable for items that belong in the wrong period.
3. Post adjusting entries: accruals, prepaid expense amortization, depreciation, inventory adjustments.
4. Run an adjusted trial balance and confirm debits equal credits.
5. Check payroll liabilities and tax deposits against payroll reports.
6. Review the income statement for anything unusual: an expense that is double the usual figure, revenue booked in the wrong month, uncategorized transactions.
7. Save your supporting schedules so the numbers can be explained later.

A disorganized file system makes every item on that list slower. Our small business checklist for organizing financial records is a good starting point if year-end always turns into a scramble.

Closing entries in accounting software

If you run your books in QuickBooks or a similar platform, you may never type a closing journal entry yourself. Most modern systems calculate net income for the year and roll it into equity when the new fiscal year begins, and they let you set a closing date that locks prior periods against casual edits. That convenience has two catches.

First, automation does not review anything. Software will happily roll forward a miscategorized $40,000 equipment purchase that was booked as repairs. Second, a lock date is a control, not a guarantee. Someone with the right permissions can still change it, and back-dated edits after the close are one of the most common reasons financial statements stop matching the filed tax return.

The practical rule: let the software do the arithmetic, but have a person confirm the post-closing result. Run the balance sheet as of your year-end date, check Retained Earnings against your prior-year figures plus net income less distributions, and confirm nobody can post into the closed period without approval.

Records you need to keep

Closing entries are part of your books, and your books are part of your tax file. IRS Publication 583 says businesses must keep records, including journals and ledgers, that support the income and expenses reported on a return, and that electronic systems must meet the same retention standards as paper books. The IRS does not prescribe one particular system, but your records must clearly show gross income, deductions and credits.

If an outside accountant prepares your close, the work product matters too. The AICPA's records retention guidance says a practitioner must, on request, promptly return client records needed to comply with federal tax obligations, and it treats supporting records such as computations, schedules and journal entries as part of what belongs to the client. In plain terms: make sure you can get your closing entries, schedules and trial balances from whoever prepares them, in a usable form, without a fight.

Perspective: what we see when businesses close their books

We work with owners and finance leads whose books range from immaculate to a year behind, and the pattern is consistent. The closing entries themselves are rarely the problem. They are four short journal entries. The trouble sits upstream: unreconciled accounts, transactions dumped in a catch-all category, payroll that does not tie to the general ledger, and no one reviewing the numbers before the period is locked.

That is why we pair every accounting engagement with experienced fractional CFO oversight. Someone who understands what the numbers should look like reads the post-closing trial balance and the financial statements, not just a bookkeeper checking that debits equal credits. A balanced ledger can still tell the wrong story.

Our advice to owners is simple:

• Close monthly, even if the close is light. Twelve small closes beat one painful one.
• Treat the post-closing trial balance as a deliverable you expect to see, not an internal worksheet.
• Do not let a lock date substitute for review.
• If you inherit messy books, clean them up first. Closing a period on top of bad data just freezes the bad data. Cleanup work is the right first project, and it is why we offer QuickBooks cleanup as a standalone engagement.

For businesses that cannot justify a full-time controller or CFO, a modular approach works well: pay for the close, the review and the reporting you actually need, and nothing else.

— Angelica

Getting help with your year-end close

If your year-end close is slow, error-prone, or handled by whoever has time, we can take it over. AmCFO provides accounting and bookkeeping that includes month-end and year-end reporting, QuickBooks cleanup and support, payroll support and tax coordination, with fractional CFO oversight on top so someone senior reviews the output. You can see how the pieces fit together on our accounting and bookkeeping page. If you are still deciding whether you need a bookkeeper or an accountant, our explainer on bookkeeping versus accounting draws the line clearly.

Common mistakes with closing entries

• Closing balance sheet accounts. Assets and liabilities carry forward. Only temporary accounts close.
• Forgetting dividends or owner draws. This is the most frequent miss, and it leaves a stray balance on the post-closing trial balance.
• Closing before adjusting. Closing entries come after adjusting entries. If depreciation or accruals are posted afterward, the close is wrong.
• Posting into a closed period. Late invoices and corrections belong in the current period, with a note, unless the prior period is formally reopened.
• Skipping the post-closing check. Without it you have no proof the close worked.
• Mixing up the sign of a loss. In a loss year, Income Summary has a debit balance, and the third entry credits Income Summary and debits Retained Earnings.

FAQ

What are the four steps in the closing process?

Close revenue accounts to Income Summary, close expense accounts to Income Summary, close Income Summary to Retained Earnings, and close Dividends (or owner draws) to Retained Earnings. After these four entries, every temporary account reads zero and Retained Earnings reflects the period's results.

When should closing entries be made?

At the end of each accounting period, after adjusting entries are posted and before the first transaction of the next period. Most businesses do a full close at fiscal year-end. Many also close monthly or quarterly so management reports are reliable.

How do I close a general ledger?

Reconcile accounts, post adjusting entries, run an adjusted trial balance, then post the closing entries and prepare a post-closing trial balance. In accounting software, you typically also set a closing date so prior-period transactions cannot be changed without permission.

Do closing entries delete my transaction history?

No. They are new journal entries that sit alongside the original transactions. Detailed history remains in the ledger, and the net result of the period moves into equity.

Sources

• OpenStax: Describe and Prepare Closing Entries for a Business
• OpenStax: Prepare a Post-Closing Trial Balance
• Business LibreTexts: Post-Closing Trial Balance
• IRS Publication 583 (Rev. December 2024)
• AICPA: Records Retention Rules, AICPA and IRS

Recommended

• The Financial Close Process: A 2026 Guide for Finance Teams
• Bookkeepers: Copyable Payroll Journal Entries and GL Mapping Checks
• Accounts Reconciliation Explained for Finance Teams
• Five Steps to Bank Reconciliation for U.S. Small Businesses, IRS Ready