What are closing entries?

You’ve journalised, posted to the ledger, prepared a trial balance, made adjusting entries, and prepared the financial statements. One step remains: resetting the temporary accounts to zero so next period starts fresh. That’s what closing entries do.

Revenue and expense accounts are temporary — they exist only to measure a single period’s performance. At year-end, they need to be cleared. Asset, liability, and capital accounts are permanent — they carry over.

Temporary vs. permanent accounts

The rule: anything on the income statement, plus drawings/dividends, is temporary and must be closed.

The four closing entries

Step 1 — Close revenue accounts

Revenue accounts have credit balances. To zero them out, debit each revenue account and credit Income Summary for the total.

Mar 31  Sales Revenue              Dr.   1,00,000
        Service Revenue            Dr.     20,000
             To Income Summary                 1,20,000

Step 2 — Close expense accounts

Expense accounts have debit balances. Credit each expense account and debit Income Summary for the total.

Mar 31  Income Summary             Dr.   85,000
             To COGS                              40,000
             To Salaries                          25,000
             To Rent                              12,000
             To Depreciation                       5,000
             To Interest                           3,000

Step 3 — Close Income Summary to Retained Earnings

The Income Summary now has a credit balance of ₹1,20,000 − ₹85,000 = ₹35,000 (net income). Close it to Retained Earnings.

Mar 31  Income Summary             Dr.   35,000
             To Retained Earnings              35,000

If the business had a net loss, the entry reverses: Dr. Retained Earnings / Cr. Income Summary.

Step 4 — Close Drawings or Dividends to Retained Earnings

Drawings (or Dividends for a company) reduce equity but flow separately from net income. Close them directly to Retained Earnings.

Mar 31  Retained Earnings          Dr.   10,000
             To Dividends                       10,000

The post-closing trial balance

After closing entries, you prepare one more trial balance — the post-closing trial balance. It contains only permanent accounts (assets, liabilities, equity). Every temporary account should now read zero.

This is the opening balance sheet for next period.

Reversing entries (optional)

Some businesses make reversing entries on the first day of the new period — they “undo” certain accruals so that when the cash actually moves, the bookkeeper can record it normally without worrying about the prior accrual.

Example: At March-end you accrued ₹70,000 salaries (Dr. Salaries Expense / Cr. Salaries Payable). On April 1 you reverse: Dr. Salaries Payable / Cr. Salaries Expense ₹70,000. Then when payroll runs April 4 for ₹75,000 total: Dr. Salaries Expense 75,000 / Cr. Cash 75,000. Net April expense = 75 − 70 = ₹5,000 (correct, because ₹70,000 belonged to March).

Reversing entries aren’t mandatory — they just save the bookkeeper from thinking about prior-period accruals every time cash moves.

The full accounting cycle, end to end

1. Identify and analyse transactions.
2. Record journal entries (Lesson 3).
3. Post to ledger T-accounts (Lesson 4).
4. Prepare unadjusted trial balance (Lesson 5).
5. Record adjusting entries (Lesson 9).
6. Prepare adjusted trial balance.
7. Prepare financial statements: income statement, balance sheet, cash flow (Lessons 6-8).
8. Record closing entries (this lesson).
9. Prepare post-closing trial balance.
10. Start next period.

That’s the complete cycle. Every business — from a freelancer to Reliance Industries — runs through these ten steps every reporting period.

Practice

Lesson recap — and course recap

• Closing entries zero out temporary accounts and roll net income into Retained Earnings.
• Permanent accounts carry forward forever; temporary ones reset each period.
• Four steps: close revenues → close expenses → close Income Summary to RE → close drawings to RE.
• Post-closing trial balance contains only permanent accounts.

You’ve finished the 10-lesson course. You now understand the full accounting cycle — the same cycle a CFO, an auditor, and a Big-4 accountant use every quarter. Next steps: practise with real transactions, explore software (Tally, QuickBooks, Xero), and consider deeper topics like consolidation, deferred tax, and IFRS 9 financial instruments.