When you manage your bookkeeping books by hand, you space responsible because that a lot of nitty-gritty details. One of your obligations is creating closing entries in ~ the finish of each accountancy period.

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What are closing entries?

Closing entries room entries offered to change balances from short-term to permanent accounts at the finish of an audit period. These journal entries condense her accounts therefore you can determine your retained earnings, or the quantity your organization has after payment expenses and dividends. Producing closing entries is one of the last measures of the accounting cycle.

Create closing entries to reflect when your accounting duration ends. For example, if your accountancy periods critical one month, usage month-end closing entries. However, businesses usually handle close up door entries annually. Every little thing accounting period you select, make certain to it is in consistent and not jump in between frequencies.

Temporary vs. Irreversible accounts

In accounting, few of your accounts space temporary and also must reset when a new period starts. These accounts track her funds throughout a certain accounting period. Short-term accounts include:


You likewise need come use irreversible accounts come track her business’s financial health and wellness from duration to period. Permanent accounts include:


Purpose of closing entries accounting

Without closing revenue accounts, you wouldn’t have the ability to compare how much your company earns each duration because the amount would construct up. And also without closing expense accounts, friend couldn’t to compare your service expenses from period to period.

You should use close up door entries to alleviate the worth of your short-lived accounts to zero. That way, your following accounting period does not have a balance in your revenue or cost account from the ahead period.

Transferring funds from momentary to long-term accounts additionally updates your little business retained earnings account. You can report retained income either on your balance paper or income statement. Without moving funds, your financial statements will be inaccurate.

How to create closing entries

Accounting software automatically handles close up door entries because that you. If you do not have accountancy software, you must manually create closing entries each accounting period.

You can develop a closing entry by closing your revenue and also expense accounts and also transferring the balances into an account called “income summary account.”

The income an overview account is only offered in closing procedure accounting. Basically, the income review account is the lot of your revenues minus expenses. You will close the income an overview account after you move the amount into the retained earnings account, i m sorry is a permanent account.

Here room the steps to creating closing entries:

Close revenue account by transporting funds come income summary accountClose price accounts by carrying funds to income an overview accountClose income review account by transferring funds come retained earnings accountClose dividend by moving funds come retained revenue account (if applicable)


Close revenue accounts

As you can see, revenue account are reduced by debits. You must debit your revenue account to diminish it, which means you must additionally credit your income review account.

XX/XX/XXXXRevenueClosing journal entriesX
Income SummaryX

Close expense accounts

Because prices are lessened by credits, you have to credit the account and debit the income an overview account.

XX/XX/XXXXIncome SummaryClosing newspaper entriesX

Close income summary account

Whether you credit or debit your income an overview account will depend on whether her revenue is more than her expenses.

If your earnings are higher than her expenses, you will certainly debit your income an overview account and also credit her retained revenue account. This boosts your retained income account.

XX/XX/XXXXIncome SummaryClosing newspaper entriesX
Retained EarningsX

If your earnings are much less than your expenses, you must credit her income summary account and debit your retained revenue account. This decreases your retained revenue account.

XX/XX/XXXXRetained EarningsClosing newspaper entriesX
Income SummaryX

Close dividend accounts

If friend paid out dividends throughout the accountancy period, you must close your dividend account. Now that the income review account is closed, you have the right to close her dividend account directly with her retained income account.

Debit her retained revenue account and also credit your dividends expense. This reduces your retained income account.

XX/XX/XXXXRetained EarningsClosing journal entriesX

Closing newspaper entries example

Let’s say your business wants to develop month-end closing entries. During the audit period, friend earned $5,000 in revenue and had $2,500 in expenses. You did no pay any dividends.

First, move the $5,000 in your revenue account to your income an introduction account. Debit revenue and credit earnings summary.

XX/XX/XXXXRevenueClosing newspaper entries5,000
Income Summary5,000

Next, transfer the $2,500 in your cost account to your income summary account. Debit the income summary account and also credit expense account.

XX/XX/XXXXIncome SummaryClosing journal entries2,500

Finally, friend are prepared to close the income summary account and also transfer the funds to the retained income account.

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After crediting your income an introduction account $5,000 and also debiting the $2,500, you room left through $2,500 ($5,000 – $2,500). Because this is a hopeful number, you will debit her income summary account and also credit her retained revenue account. This to add the $2,500 to your retained income account.

XX/XX/XXXXIncome SummaryClosing journal entries2,500
Retained Earnings2,500

Interested in automating this process? with Patriot’s accountancy software, you can handle closing entries v the touch of a button. And, girlfriend can choose an accounting period that works finest for your business. Try it for free today!