Definition
A closing entry brings revenue and expense accounts to zero at the end of a fiscal year and moves the net result to equity. The usual route is through the income summary account into retained earnings. After closing, only balance sheet accounts carry balances, ready to open the next year.
How it works
Revenue and expense accounts are temporary: they measure one year's performance and must start the next year at zero. Asset, liability and equity accounts are permanent and carry forward. Closing entries separate the two.
The classic sequence has three steps: close revenues into the income summary, close expenses into it, then close its balance (the profit or loss) to retained earnings. Dividends or drawings accounts, if used, are closed directly to retained earnings.
Post closing entries only after all adjustments are final, and lock the year afterwards. Ledgeriano generates the closing entries and the next year's opening entry in one step, and can reopen a year if a late adjustment is needed. See the year-end closing guide.
Example: closing a profitable year
Revenue 120,000 and expenses 95,000 leave a profit of 25,000 that moves to retained earnings.
| Step | Account | Debit | Credit |
|---|---|---|---|
| 1 | Revenue | 120,000 | |
| 1 | Income summary | 120,000 | |
| 2 | Income summary | 95,000 | |
| 2 | Expenses (all) | 95,000 | |
| 3 | Income summary | 25,000 | |
| 3 | Retained earnings | 25,000 |