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Closing Entries in Accounting: Definition, Steps & Examples
Do San (Justin) Myung
Expert Accountant & Former Consulting CFO
Do San (Justin) Myung
Expert Accountant & Former Consulting CFO
Justin (Do San Myung) is Expert Accountant at DualEntry with 20+ years of hands-on experience managing general ledgers, financial close processes, and ERP implementations for mid-market and enterprise companies. As a former Consulting CFO and Controller, he has personally overseen month-end closes, SOX compliance programs, and multi-entity consolidations across technology, manufacturing, and services industries. Justin specializes in transforming manual accounting workflows into automated, AI-driven processes.
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Last updated
November 11, 2026
Reviewed by
Woosung Chun
Woosung Chun
CFO
Woosung Chun is the CFO of DualEntry with experience in corporate finance, accounting, strategy, and acquisitions. He previously grew from scratch and led the M&A and Finance teams at Benitago, where he completed more than 12 acquisitions in 2 years. He graduated with a BS from NYU Stern. At DualEntry, Woosung writes about AI in accounting, revenue recognition, foreign currency accounting, hedge accounting, and ERP modernization for finance teams navigating complex, multi-entity environments.
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Summarize this article
TL;DR
- Closing entries reset temporary accounts at fiscal year-end: Revenue, expense, and dividend balances are transferred to retained earnings, so the new year’s income statement starts at zero.
- The traditional method uses four entries: Revenue and expenses close to an income summary account, income summary closes to retained earnings, and dividends close directly to retained earnings.
- Most companies post them only at fiscal year-end: Monthly reporting usually doesn’t require resetting income statement accounts by hand.
- Modern accounting software can automate year-end closing: Depending on the system, retained earnings may be calculated automatically without requiring manual closing journal entries.
- A retained earnings tie-out checks the result: Opening retained earnings plus net income, minus dividends, plus or minus other adjustments to retained earnings, should equal the closing balance.
Think of an income statement as a scoreboard for the financial year. When a new year begins, the scoreboard resets to zero, but the company's accumulated results don't disappear.
In accounting, closing entries perform that reset. They clear temporary revenue, expense, and dividend accounts, transferring the year's net result and distributions into retained earnings.
To understand how that works in practice, we'll walk through the four closing entries with a worked example, explain how they differ from adjusting and reversing entries, and show how accounting software handles the year-end process.
[tldr]
What are closing entries?
Closing entries are the journal entries that empty a company’s temporary accounts at the end of the fiscal year. Revenue, expense, and dividend accounts describe a single fiscal year, so their balances move into retained earnings in a corporation or the owner’s capital account in a sole proprietorship.
In the traditional accounting cycle, closing entries come after accountants post adjusting entries and prepare the financial statements from the adjusted trial balance, and before the post-closing trial balance. If an audit adjustment or correction arrives after closing, the accountant records it and closes any temporary account it changes, so retained earnings reflect it.
Most companies close temporary accounts only at fiscal year-end [1]. Monthly income statements report each month’s activity without resetting the accounts, so monthly closing entries are uncommon, though some manual systems post them.
The word “close” also covers three related jobs. Closing entries transfer temporary balances, the month-end or year-end close covers adjusting, reconciling, and reviewing, and a period lock stops further postings to reviewed dates.
Temporary vs. permanent accounts
Every account in a chart of accounts is either temporary or permanent, and the financial statement it appears on tells you which, with one exception.
Income statement accounts are temporary and close to zero at the end of each fiscal year. Balance sheet accounts are permanent and carry their balances into the next fiscal year.
The exception is dividends and owner’s drawings. They reduce equity, but they’re temporary and close each fiscal year.
The four closing entries in accounting
Here’s how to do closing entries with the traditional four-entry method, in the order they’re recorded [1].
The first three run through the income summary, a temporary account used only during closing. It gathers the year’s revenue and expenses so net income shows up as a single balance before it moves to retained earnings.
1. Close revenue accounts
Revenue accounts normally have credit balances, so closing them requires a debit for each account’s full balance. Contra-revenue accounts, such as sales returns and discounts, carry debit balances and are closed with credits. The matching credit to income summary moves the fiscal year’s revenue into one account and leaves every revenue account at zero.
2. Close expense accounts
Closing expense accounts works the other way round, with each expense account credited for its debit balance and income summary debited for the total. Income summary now holds the difference between revenue and expenses. A credit balance is net income, and a debit balance is a net loss.
3. Close the income summary account
The third entry, the retained earnings closing entry, empties income summary into retained earnings. With net income, debit income summary and credit retained earnings, which adds the year’s profit to what the company has kept. With a net loss, the entry flips, and the debit to retained earnings reduces it.
4. Close dividends or drawings
Dividends and owner’s drawings close straight to retained earnings or owner’s capital and skip income summary, because they’re distributions to owners and play no part in calculating net income. Credit dividends for their balance and debit retained earnings, or credit drawings and debit the owner’s capital account.
Closing entries example
This closing journal entries example follows a hypothetical SaaS corporation that uses accrual accounting, has a December 31 fiscal year-end, reports in US dollars, and records dividends declared in a separate dividends account. Its 2026 adjusting entries are done, and the extract below shows the accounts closing entries affected.
Extract from the adjusted trial balance, December 31, 2026.
Entry 1: Close revenue and other income accounts
Entry 2: Close expense accounts
Income summary now has a $600,000 credit balance ($9,050,000 − $8,450,000), which is the year’s net income. That figure should match net income on the income statement. If it doesn’t, an account was missed, closed twice, or closed for the wrong amount.
Entry 3: Close income summary
Entry 4: Close dividends
Every entry balances, and the check below compares account balances before and after closing.
$2,300,000 + $600,000 − $200,000 = $2,700,000.
Income summary is optional, and a company can instead close its revenue and expense accounts straight to retained earnings in one entry [1]. The ending balance is the same $2.7 million, with a net $600,000 credit to retained earnings replacing entries 1–3.
If the company made a loss
If sales and marketing had cost $3,900,000 instead of $3,200,000, total expenses would be $9,150,000, or $100,000 more than revenue and interest income combined.
Income summary would then hold a $100,000 debit balance, so entry 3 runs the other way, debiting retained earnings and crediting income summary for $100,000. After dividends, retained earnings would end at $2,000,000 ($2,300,000 − $100,000 − $200,000).
Years of losses and dividends can outweigh a company’s total profits and push retained earnings below zero. That negative balance is called an accumulated deficit.
Closing entries vs. adjusting and reversing entries
Adjusting, closing, and reversing entries are all made around the end of a period, in that order, which makes them easy to mix up.
In this example, the January 9 payroll pays $5,000, of which $2,000 was earned in December. Ignoring tax withholding, the payroll entry debits salaries expense $5,000 and credits cash $5,000. After the $2,000 reversal, January’s salaries expense nets to $3,000, the wages earned in January, while December keeps its $2,000. Without the reversal, expensing the full $5,000 would count December’s $2,000 twice.
Companies that report monthly post adjusting entries at every month-end, and those that use reversing entries reverse selected accruals at the start of the next month.
How accounting software handles closing entries
In traditional accounting, closing entries transfer revenue and expense balances into retained earnings at fiscal year-end. Modern accounting software can handle this process automatically, although the method varies by system.
Some systems generate closing journal entries for accountants to review and post [2]. Others calculate retained earnings automatically on financial reports without creating separate closing entries [3].
For example, DualEntry calculates retained earnings at report time using prior-year income and expense activity, removing the need for manual year-end closing journals.
Regardless of the method, accountants still need to complete year-end adjustments, reconcile balances, and verify that retained earnings are accurate.
Common closing entry mistakes
A closing error can misstate retained earnings, leave a balance in a temporary account, or go unnoticed because a second error offsets it. Each mistake below comes with the check that catches it.
- Closing permanent accounts: Assets, liabilities, and equity carry into the next fiscal year in the general ledger, so zeroing one erases a real balance. Close only temporary accounts, then check that the post-closing trial balance lists permanent accounts alone.
- Closing before adjusting: A missing accrual sends the wrong net income to retained earnings. Post every adjusting entry before you close.
- Closing dividends through income summary: Dividends aren’t an expense, so income summary ends up below the year’s net income. Close them straight to retained earnings instead.
- Skipping the retained earnings tie-out: It’s how you catch entries posted to the wrong period or account type. Check that opening retained earnings plus net income, minus dividends, plus or minus other adjustments to retained earnings, equals the closing balance, with every figure as of the same fiscal year-end, as in the example above. Public companies must present this reconciliation for each equity caption, with distributions to owners shown separately, under Rule 3-04 of SEC Regulation S-X [
4]. - Adding textbook closing journals your system doesn’t need: Check your system’s documented year-end workflow and your accountant’s instructions before posting one. Distributions, corrections, and approved equity adjustments are still recorded as usual.
Simplify the financial close with DualEntry
A manual closing entry is one more place for retained earnings to go wrong, and DualEntry, the agentic ERP, doesn’t post one. Instead, its balance sheet calculates retained earnings at report time, adding up prior-year income and expense activity without requiring a closing journal.
That calculation is only as accurate as the postings in DualEntry’s general ledger software. Recurring accruals post from saved templates instead of being re-entered each month, and Bank Match AI suggests matches between bank transactions and the ledger for you to accept, leaving anything it can’t resolve unmatched for review.
Once a month is reviewed, period locking in DualEntry’s close management software stops ordinary postings into it, even from an admin, and logs every lock and unlock.
Audit and year-end corrections go in as adjusting entries. Unlike the everyday adjustments described earlier, these are flagged journal entries that, once the feature is turned on for the company, a user with the Adjusting Entry permission can post into a locked period without reopening it, as long as no line hits a locked payables or receivables ledger. Reports leave them out by default, so monthly results stay as reviewed, and the year-end retained earnings tie-out should use a report that includes them.
Closing Entries in Accounting FAQs
Which accounts are not closed at the end of the accounting period?
Assets, liabilities, and equity keep their balances into the next fiscal year, and so do contra-assets such as accumulated depreciation. Retained earnings receives the closed balances but is never closed itself.
Are closing entries made every month or only at year-end?
Most companies make them only at fiscal year-end. Monthly and quarterly income statements report each period’s activity without resetting the accounts, so closing them more often is rarely necessary.
What is the difference between a closing entry and a post-closing trial balance?
A closing entry transfers a temporary account’s balance to retained earnings, either directly or through income summary. The post-closing trial balance, prepared afterward, checks the result by listing only permanent accounts, with debits equal to credits.
Can closing entries be automated?
Yes. Some accounting systems calculate retained earnings automatically without requiring a separate closing journal, while others generate closing entries for accountants to review and post. Accountants still need to complete year-end adjustments, reconcile balances, and verify the closing figures.
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Justin (Do San Myung) is Expert Accountant at DualEntry with 20+ years of hands-on experience managing general ledgers, financial close processes, and ERP implementations for mid-market and enterprise companies. As a former Consulting CFO and Controller, he has personally overseen month-end closes, SOX compliance programs, and multi-entity consolidations across technology, manufacturing, and services industries. Justin specializes in transforming manual accounting workflows into automated, AI-driven processes.
