Accounting Cycle

Closing Entries

Closing entries signal the end of an accounting period. Once these entries are journalized and posted, the accounting cycle ends with the preparation of a post-closing trial balance.

A closing entry, a journal entry prepared to close the books and move to the next accounting period, is made in the general journal, as are all other journal entries. The closing entries are not triggered by economic events. Temporary accounts, such as revenue and expense accounts, are a category of accounts that do not retain a balance, or are "zeroed out," when moving from one accounting period to the next. The closing process consists of three steps to close temporary accounts to retained earnings, which is a permanent account on the balance sheet. Some companies handle closing in slightly different ways, but in all cases, the activity in temporary accounts becomes part of retained earnings.

Step 1: Close revenue accounts to retained earnings.

Revenue accounts have natural credit balances, so they must be closed with debits, making their balance zero. The closing entry can be made directly to retained earnings.

There is only one revenue account in the December books—service revenue. It is closed with the new balance in service revenue being reduced to zero. The result is a credit (increase) to retained earnings of $46,000.

Entry to Close Revenue Account to Retained Earnings

Date Account Debit Credit
12/31/2018 Service revenue $46,000
      Retained earnings $46,000

Step 2: Close expense accounts to retained earnings.

Expense accounts have natural debit balances, so they must be closed with credits, making their balance zero. The closing entry can be made directly to retained earnings.

Five expense accounts need to be closed with the new expense balances being reduced to zero. The result is a debit (decrease) to retained earnings of $41,900.

Entry to Close Expense Accounts to Retained Earnings

Date Account Debit Credit
12/31/2018 Retained earnings $41,900
      Salary expense $30,000
      Repair expense $7,000
      Depreciation expense $4,400
      Interest expense $300
      Supplies expense $200

Step 3: Close dividends, if any, to retained earnings.

With no dividends, no adjustment is necessary. However, because the dividends account has a natural debit balance (though dividends are not expenses), it is closed with a credit to the dividends account. The closing entry can be made directly to retained earnings.

Entry to Close Dividends Account to Retained Earnings

Date Account Debit Credit
12/31/2018 Retained earnings $1,000
      Dividends $1,000

The result of the closing process is an increase in retained earnings of $46,000 from revenue, and a decrease in retained earnings of $41,900 from expenses. The net effect on retained earnings is a positive $4,100, as reflected on the 12/31/18 Balance Sheet. The post-closing trial balance represents the end of the accounting cycle. The result is only permanent accounts survive, with all temporary accounts being zeroed out. This clears the books to begin a new accounting cycle.