Accounting Glossary

Closing Journal Entries

What are Closing Journal Entries?

Closing journal entries are accounting entries made at the end of an accounting period, such as the Month-End Close and Year-End Close. They transfer balances from temporary accounts to permanent accounts. This process resets the balances of revenue and expense accounts to zero, so the next accounting period starts fresh.

Temporary accounts track financial activity for one reporting period. These include revenue, expenses, and dividends or withdrawals. At the end of the period, their balances are closed out through a series of closing journal entries. Typically, an income summary account is used as an intermediate step before transferring the net result to retained earnings.

Core Applications

Recording closing journal entries is important for preparing financial statements and completing the accounting cycle. These steps help maintain the integrity of the company’s financial records across reporting cycles. Common applications include:

  • Resetting temporary accounts, such as revenue and expense accounts, at the end of the period
  • Summarizing company performance through the income summary account
  • Transferring net income or loss into retained earnings within permanent accounts
  • Preparing the accounting system for the next reporting period
  • Ensuring that income and expenses are recorded only within the correct accounting period

The Financial Closing Process

The process of creating closing journal entries typically follows a structured sequence.

  1. Close revenue accounts
    Revenue balances are transferred to the income summary account.
  2. Close expense accounts
    All expense accounts are transferred to the income summary account.
  3. Close the income summary account
    The balance of the income summary account (net income or loss) is transferred to retained earnings within permanent accounts.
  4. Close dividends or withdrawals (if applicable)
    Distributions to owners are transferred to retained earnings.

Closing Journal Entry Examples:

  • Revenue accounts show $500,000.
  • Expense accounts total $350,000.
  • The income summary account reflects net income of $150,000.
  • This balance is then transferred to retained earnings, completing the closing journal entries process.


Why It Matters for Accountants

Recording closing journal entries keeps financial data organized across accounting periods. Without these entries, temporary accounts would continue to accumulate balances. This would make it hard to measure performance accurately. For accounting teams, a consistent closing process ensures that revenue and expense accounts reflect only the activity from the relevant reporting period. Especially for frequent closing processes such as month-end, smart use of AI and other types of closing automation are key for increasing an accounting teams' efficiency and reducing burnout.

Key benefits include:

  • Clear separation between reporting periods
  • Accurate preparation of financial statements
  • Proper maintenance of permanent accounts, such as retained earnings
  • Reliable data for financial analysis and decision-making

Read more about Journal Entry Management here