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 then resets the revenue, expense, and owner-distribution accounts for April while carrying March profit into Retained Earnings.
What closing changes—and what it preserves
The distinction between temporary and permanent accounts determines which balances reset during closing:
- 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.
- Close any owner-distribution balance separately; Maple Tech has none in March.
- Prepare a post-closing trial balance containing only permanent accounts.
Maple Tech’s March closing entry
Maple’s adjusted records contain $7,000 of Service Revenue and $3,200 of expenses. The difference is $3,800 profit. Maple closes the temporary accounts directly to Retained Earnings:
| Account | Debit | Credit |
|---|---|---|
| Service Revenue | 7,000 | |
| Rent Expense | 1,500 | |
| Supplies Expense | 1,500 | |
| Depreciation Expense | 200 | |
| Retained Earnings | 3,800 |
The debit removes the revenue credit balance. The three credits remove the expense debit balances. The remaining $3,800 credit carries March profit into Retained Earnings.
System variations
Some systems first close revenue and expenses to a temporary Income Summary account, then transfer the net amount to Retained Earnings. A system may also reverse selected accrual adjustments at the start of the next period. A reversing entry is an optional entry that undoes a selected accrual on the first day of the new period so a later routine payroll or invoice entry can record the full cash-period amount without counting the earlier accrual twice. Reversing does not alter the prior period’s statements and is separate from closing. These workflows differ, but the purpose of closing remains the same.
The post-closing checkpoint
| 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
| 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 |
Permanent balances continue into April
Closing does not erase receivables or payables. When Maple collects the March receivable and pays the March supplier in April, it settles those permanent balances without recognizing March revenue or supplies expense again.
| Account | Debit | Credit |
|---|---|---|
| Cash | 1,000 | |
| Accounts Receivable | 1,000 |
| Account | Debit | Credit |
|---|---|---|
| Accounts Payable | 2,400 | |
| Cash | 2,400 |
After these two settlements alone, Cash would be $41,100. Neither settlement changes April profit.
Common mistakes
- 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.