Closing the Books

Closing entries zero out revenue, expense, and drawings accounts at period-end, rolling their effect into Capital and resetting the books for the next accounting period.

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Key things to remember

1Closing the books reduces revenue, expense, and drawings accounts to zero at period-end.
2Temporary accounts (Revenue, Expenses, Drawings) don't carry forward; permanent accounts (Assets, Liabilities, Capital) do.
3Four closing entries: close Revenue to Income Summary, close Expenses to Income Summary, close Income Summary to Capital, close Drawings to Capital.
4The post-closing trial balance lists only permanent accounts, and its debits must still equal its credits.
5The full accounting cycle: journalize → post → trial balance → work sheet/adjustments → statements → close → post-closing trial balance.

If Fees Earned kept accumulating year after year without ever resetting, it would be impossible to tell this year's revenue from every other year's combined. Closing the books is the process by which revenue and expense accounts are reduced to zero at the end of each accounting period, so each new period starts fresh.

Temporary vs. Permanent Accounts

Temporary accounts are reduced to zero at the end of each accounting period — they do not carry their balance forward from period to period. Revenue, Expense, and Drawings accounts are all temporary. Permanent accounts are asset, liability, and owner's Capital accounts; their balances are carried forward from accounting period to accounting period, continuing to build on themselves year after year.

Temporary accounts (closed to zero)	Permanent accounts (carried forward)
Revenue (e.g., Fees Earned)	Assets (e.g., Cash)
Expenses (e.g., Wages Expense)	Liabilities (e.g., Accounts Payable)
Drawings	Owner's Capital

Fig 1Revenue and expenses close through Income Summary into Capital; Drawings closes straight to Capital.

The Four Closing Entries

Close Revenue to Income Summary — debit each revenue account for its balance, credit Income Summary for the total. This brings revenue accounts to zero.
Close Expenses to Income Summary — credit each expense account for its balance, debit Income Summary for the total. This brings expense accounts to zero.
Close Income Summary to Capital — Income Summary now holds the net income or net loss as its own balance; close it into Capital (debit Capital for a net loss, or credit Capital for net income).
Close Drawings to Capital — debit Capital, credit Drawings, for the Drawings balance. This brings Drawings to zero.

Date	Account	Debit	Credit
Dec 31	Fees Earned	2,450
	Income Summary		2,450
Dec 31	Income Summary	4,950
	Rent Expense		700
	Wages Expense		650
	Gas Expense		150
	Supplies Expense		570
	Depreciation Expense—Equipment		1,080
	Depreciation Expense—Truck		1,800
Dec 31	J. Reyes, Capital	2,500
	Income Summary		2,500
Dec 31	J. Reyes, Capital	400
	J. Reyes, Drawings		400

Trillium Bike Repair's four closing entries. Income Summary: credited $2,450, debited $4,950, leaving a $2,500 debit balance (a loss) closed to Capital.

The Post-Closing Trial Balance

After closing, only permanent accounts have balances left. The post-closing trial balance is prepared as one final check: it lists only assets, liabilities, and Capital, and its debit and credit totals must still be equal, proving the ledger is ready for the next period.

Account	Debit	Credit
Cash	$9,500
Accounts Receivable	$700
Supplies	$180
Equipment	$6,000
Accumulated Depreciation—Equipment		$1,080
Truck	$9,000
Accumulated Depreciation—Truck		$1,800
Bank Loan		$8,000
Accounts Payable		$400
J. Reyes, Capital		$14,100
Totals	$25,380	$25,380

Trillium Bike Repair — Post-Closing Trial Balance — December 31, 2026.

Fig 2The full accounting cycle: journalize, post, trial balance, work sheet, adjust, statements, close, post-closing trial balance — then it repeats.

The accounting cycle, start to finish

Journalize transactions → post to the ledger → prepare a trial balance → complete the work sheet (with adjustments) → prepare financial statements → journalize and post adjusting entries → journalize and post closing entries → prepare a post-closing trial balance. Then the whole cycle begins again for the next period.

Worked examples

Reveal one step at a time and try to beat it to the next line.

Example 1

Fees Earned has a $2,450 credit balance at year-end. Prepare the closing entry for this revenue account.

Example 2

After Trillium's revenue and expenses are closed, Income Summary has been credited $2,450 and debited $4,950. Close Income Summary to Capital.

Example 3

J. Reyes, Drawings has a $400 debit balance at year-end. Prepare the closing entry, and state Drawings' balance after posting.

Where marks get lost

Closing Drawings into Income Summary instead of directly into Capital — Drawings never touches Income Summary at all.
Getting the direction of the Income Summary-to-Capital entry backwards — a net loss (debit balance in Income Summary) is closed with a debit to Capital and a credit to Income Summary; a net income (credit balance) is closed with a credit to Capital and a debit to Income Summary.
Forgetting that Assets, Liabilities, and Capital are permanent accounts and should never be closed — only Revenue, Expenses, and Drawings are closed.
Skipping the post-closing trial balance and assuming the books are ready for the next period without checking debits still equal credits.
Closing expense accounts with a debit instead of a credit — expense accounts have debit balances, so closing them (bringing them to zero) requires a credit.

Flashcards 7

Closing the books

Temporary accounts

Permanent accounts

Income Summary

+ 3 more

Practice

Which of these is a temporary account?

Drawings is closed by...

Why do temporary accounts need to be closed each period?

Put the four closing entries in the correct order.

1Close Expenses to Income Summary
2Close Drawings to Capital
3Close Income Summary to Capital
4Close Revenue to Income Summary

Income Summary is credited $8,200 (from revenue) and debited $6,700 (from expenses). What amount, and in which direction, closes Income Summary to Capital?

The post-closing trial balance should list...

List the accounting cycle's main steps in order, starting from journalizing.

On Trillium's post-closing trial balance, if total debits are $25,380, what must total credits equal?

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