Closing entries are the journal entries made at the end of an accounting period to zero out the temporary accounts — revenues, expenses, and dividends (or drawings) — and move their balances into retained earnings or the owner's capital account. There are four of them, always in the same order: close revenues to Income Summary, close expenses to Income Summary, close Income Summary (which now holds net income) to Retained Earnings, and close Dividends directly to Retained Earnings. Once all four are posted, every temporary account reads zero and the next period starts with a clean slate.
Below are all four entries worked with one consistent set of numbers, so you can see exactly how the amounts tie together — and make the entries yourself on an exam.
The whole reason closing entries exist is that some accounts measure a single period and some measure a running total.
Closing entries drain each temporary account to zero and deposit the net result where it permanently belongs: retained earnings (for a corporation) or the owner's capital account (for a sole proprietorship or partnership). They come after adjusting entries and after the financial statements are prepared — closing is the last journalizing step of the accounting cycle.
Suppose Kestrel Design Co. finishes its year on December 31 with these adjusted balances:
Total revenues are $79,550 and total expenses are $67,900, so net income is $79,550 − $67,900 = $11,650. Keep that number in mind — the closing process has to reproduce it, which is your built-in check.
Revenue accounts carry credit balances, so to zero them out you debit each one for its full balance and credit Income Summary for the total.
| Account | Debit | Credit |
|---|---|---|
| Service Revenue | $78,400 | |
| Interest Revenue | $1,150 | |
| Income Summary | $79,550 |
The debit side is just each revenue account's own balance. The credit to Income Summary is their sum — nothing is invented, only relocated.
Expense accounts carry debit balances, so the entry flips: credit each expense for its balance and debit Income Summary for the total.
| Account | Debit | Credit |
|---|---|---|
| Income Summary | $67,900 | |
| Salaries Expense | $41,200 | |
| Rent Expense | $14,400 | |
| Depreciation Expense | $6,250 | |
| Supplies Expense | $3,180 | |
| Utilities Expense | $2,870 |
Pause and look at Income Summary. It has a $79,550 credit from Entry 1 and a $67,900 debit from Entry 2, leaving a credit balance of $11,650 — exactly the net income from the income statement. If the Income Summary balance doesn't equal net income, one of your first two entries used a wrong amount. Fix it before moving on.
Income Summary now holds net income, and net income belongs to the owners. Debit Income Summary to zero it out and credit Retained Earnings.
| Account | Debit | Credit |
|---|---|---|
| Income Summary | $11,650 | |
| Retained Earnings | $11,650 |
If the period produced a net loss, Income Summary would hold a debit balance instead, and this entry reverses direction: credit Income Summary, debit Retained Earnings. Retained earnings shrinks — which is exactly what a loss should do.
Dividends is a temporary account with a debit balance, but it is not an expense — paying owners is a distribution of profit, not a cost of earning it. So it never touches Income Summary. Close it straight against Retained Earnings.
| Account | Debit | Credit |
|---|---|---|
| Retained Earnings | $4,000 | |
| Dividends | $4,000 |
In a sole proprietorship, the same four entries run through the owner's Capital account instead of Retained Earnings, and Drawings replaces Dividends. The mechanics are identical.
After posting, a post-closing trial balance should contain only permanent accounts — every revenue, expense, and dividend line is gone. That's how you verify the process worked.
Income Summary is a clearing account: it exists for about three journal entries a year and holds a balance for only a moment. You could technically skip it and close every revenue and expense directly into Retained Earnings, and some companies' software does exactly that. Textbooks (and most exams) keep it for one good reason — it makes net income visible in the ledger before it disappears into equity.
After Entries 1 and 2, Income Summary's balance is revenues minus expenses. That gives you a checkpoint: the ledger's own arithmetic must reproduce the income statement's bottom line. If Income Summary shows $11,650 credit and your income statement says net income is $11,650, the closing process is tying. If they disagree, you caught the error before it corrupted Retained Earnings — which is much harder to untangle after the fact.
One more property worth noticing: Income Summary starts the period at zero and ends the period at zero. It never appears on any financial statement.
Closing Dividends through Income Summary. This is the classic exam trap. Because Dividends has a debit balance like an expense, it feels like it should join Entry 2. It must not — routing it through Income Summary would make the Income Summary balance equal $7,650 instead of $11,650, and net income would no longer tie. Dividends closes directly to Retained Earnings, always.
Closing permanent accounts. Multiple-choice questions love "which of the following is not a closing entry?" Any entry that zeroes out Cash, Supplies, Accumulated Depreciation, Unearned Revenue, or Common Stock is the wrong answer — balance sheet accounts are never closed. If the account would appear on a balance sheet, leave it alone.
Getting the direction wrong on a net loss. Students memorize "debit Income Summary, credit Retained Earnings" as Entry 3 and apply it blindly. That pattern only holds for net income. With a loss, Income Summary sits at a debit balance, so zeroing it requires a credit to Income Summary and a debit to Retained Earnings. Don't memorize the sides — ask which side the balance is on, then do the opposite.
Four entries, fixed order: revenues → Income Summary, expenses → Income Summary, Income Summary (= net income) → Retained Earnings, Dividends → Retained Earnings. Every entry's debits equal its credits, and the Income Summary balance after the first two entries must equal net income — that's your check.
After. The order at period end is: adjusting entries, adjusted trial balance, financial statements, then closing entries, then the post-closing trial balance. Closing uses the adjusted balances, so adjusting has to finish first.
Permanent (real) accounts — assets, liabilities, and equity. Cash, Accounts Receivable, Equipment, Accumulated Depreciation, Accounts Payable, Unearned Revenue, Common Stock, and Retained Earnings all keep their balances into the next period.
Entries 1, 2, and 4 are unchanged. In Entry 3, Income Summary holds a debit balance (expenses exceeded revenues), so you credit Income Summary for the loss and debit Retained Earnings, reducing equity by the amount of the loss.
Not strictly — you can close revenues and expenses directly into Retained Earnings, and most accounting software effectively does. But the Income Summary method is what introductory courses and the CPA exam expect, and its balance gives you a built-in check against net income.
No. It exists only during the closing process — it starts at zero, briefly holds net income or loss between Entries 2 and 3, and ends at zero. It never appears on the income statement or balance sheet.
Same four entries, different equity accounts: revenues and expenses still close through Income Summary, but Income Summary closes to the owner's Capital account instead of Retained Earnings, and Drawings (instead of Dividends) closes against Capital.
By the FinanceBrain Team · Last verified July 10, 2026 · How we produce and verify articles