Quick answer
Closing entries transfer the completed period’s revenue, expense, and owner-distribution balances into equity, then leave those temporary accounts at zero for the next period. Assets, liabilities, and equity balances remain in the ledger and carry forward.
Financial statements are prepared from adjusted balances before temporary accounts are closed. Closing resets those temporary accounts for the next period and transfers their net balances into the appropriate equity accounts. It does not move cash or create a new profit.
Effects and boundaries of closing entries
Closing follows financial-statement preparation and leaves only permanent balances in the ledger:
- Confirm that adjustments are posted and the statements are prepared.
- Close revenue and expense balances into Retained Earnings, either directly or through a temporary clearing account such as Income Summary, which first collects those balances and then transfers the net profit or loss to Retained Earnings.
- Close any owner-distribution balance separately when one exists.
- Prepare a post-closing trial balance containing only permanent accounts.
A corporation closes its revenue and expenses to Retained Earnings; a sole proprietor may instead use an owner-capital account. Reversing selected accruals in a later period is separate from closing temporary accounts.
When dividends are recorded in a temporary Dividends account, close its debit balance by debiting Retained Earnings and crediting Dividends. This transfers owner distributions separately from the revenue and expenses that determine profit.
Close Maple Tech’s March temporary accounts
Maple Tech starts with no retained earnings and declares no dividends. Its adjusted March records contain $7,000 of Service Revenue, $1,500 of Rent Expense, $1,500 of Supplies Expense, and $200 of Depreciation Expense. Expenses total $3,200 and profit is $3,800. Maple closes these temporary balances directly to Retained Earnings.
Service Revenue has a $7,000 credit balance, so a $7,000 debit removes it. The three expense accounts have debit balances totalling $3,200, so equal credits remove them. The balancing $3,800 credit transfers March profit to Retained Earnings.
Scroll horizontally to see all columns.
| Account | Debit | Credit |
|---|---|---|
| Service Revenue | 7,000 | |
| Rent Expense | 1,500 | |
| Supplies Expense | 1,500 | |
| Depreciation Expense | 200 | |
| Retained Earnings | 3,800 |
Check Maple Tech’s post-closing balances
Scroll horizontally to see all columns.
| Account | Debit | Credit |
|---|---|---|
| Cash | 42,500 | |
| Accounts Receivable | 1,000 | |
| Supplies | 900 | |
| Equipment | 12,000 | |
| Accumulated Depreciation — Equipment | 200 | |
| Accounts Payable | 2,400 | |
| Common Shares | 50,000 | |
| Retained Earnings | 3,800 | |
| Total | 56,400 | 56,400 |
Both columns total $56,400. Revenue and expense accounts are absent, while Retained Earnings now carries the $3,800 profit. The columns exceed the $56,200 balance-sheet total because the trial balance lists the $200 accumulated-depreciation credit separately; the balance sheet nets it against Equipment.
What closing does to the reports
Scroll horizontally to see all columns.
| Statement | Account | Effect | Timing |
|---|---|---|---|
| March financial statements | All reported amounts | No change; the statements were prepared from adjusted balances | Before closing |
| Next-period ledger | Revenue and expenses | Begin at zero | After closing |
| Balance sheet | Retained Earnings | Carries forward $3,800 | At March 31 and into April |
- March financial statements
- AccountAll reported amounts
- EffectNo change; the statements were prepared from adjusted balances
- TimingBefore closing
- Next-period ledger
- AccountRevenue and expenses
- EffectBegin at zero
- TimingAfter closing
- Balance sheet
- AccountRetained Earnings
- EffectCarries forward $3,800
- TimingAt March 31 and into April
Continuing permanent balances
Closing does not erase receivables or payables. Collecting a receivable or paying a supplier in the next period settles those permanent balances without recognizing the earlier revenue or expense again.
Collection debits Cash and credits Accounts Receivable; payment debits Accounts Payable and credits Cash. Those entries exchange or settle balance-sheet amounts. The revenue or expense stays in the period in which it was recognized.
Common errors
- Closing assets, liabilities, share capital, or accumulated depreciation.
- Closing before identified adjustments and statements are complete.
- Treating dividends or drawings as expenses rather than separate owner distributions.
- Assuming a post-closing trial balance proves every March treatment was correct.