Overview

• What you’ll learn: The purpose of closing entries, the four closing steps, the Income Summary account, the difference between temporary and permanent accounts, and preparing the post-closing trial balance.
• Prerequisites: Lesson 4 — The Trial Balance
• Estimated reading time: 15 minutes

Introduction

The Grand Historian records: At the end of each accounting period, the books must be cleansed — the temporary accounts that tracked this period’s performance must be emptied, their contents poured into the permanent vessel of Retained Earnings. This ritual of closing is as necessary as the annual audit of the imperial treasury: without it, this year’s income would mingle with next year’s, and the chronicles of each period would become an indecipherable muddle.

Closing entries serve one purpose: to reset all temporary accounts (revenue, expenses, dividends) to zero so that the next period begins with a clean slate.

Temporary vs. Permanent Accounts (Review)

Temporary accounts accumulate data for a single period and are closed to zero at period end. Permanent accounts carry their balances forward to the next period.

The Four Closing Steps

Step 1: Close Revenue Accounts to Income Summary

Revenue accounts have credit balances. To close them, debit each revenue account and credit Income Summary.

  Debit:  Service Revenue       $7,700
  Credit: Income Summary        $7,700
  (Close revenue to Income Summary)

Step 2: Close Expense Accounts to Income Summary

Expense accounts have debit balances. To close them, credit each expense account and debit Income Summary.

  Debit:  Income Summary        $4,300
  Credit: Rent Expense          $2,000
  Credit: Insurance Expense     $1,000
  Credit: Wages Expense           $800
  Credit: Depreciation Expense    $500
  (Close expenses to Income Summary)

Step 3: Close Income Summary to Retained Earnings

The Income Summary now shows the net income (or net loss) for the period. Close it to Retained Earnings.

  Income Summary balance: $7,700 - $4,300 = $3,400 (credit = net income)

  Debit:  Income Summary        $3,400
  Credit: Retained Earnings     $3,400
  (Close net income to Retained Earnings)

Step 4: Close Dividends to Retained Earnings

Dividends (or Owner’s Drawings) have a debit balance. Close directly to Retained Earnings.

  Debit:  Retained Earnings     $1,000
  Credit: Dividends             $1,000
  (Close dividends to Retained Earnings)

The Income Summary Account

Income Summary is a special temporary account that exists only during the closing process. It serves as a holding account — revenue flows in, expenses flow in, and the net result flows to Retained Earnings. After closing, its balance is zero, and it disappears until the next closing.

Some organizations bypass Income Summary entirely, closing revenue and expenses directly to Retained Earnings. Both methods produce the same result.

Post-Closing Trial Balance

After all closing entries are posted, prepare a post-closing trial balance. It should contain only permanent accounts (assets, liabilities, equity), and all temporary accounts should show zero balances.

This trial balance is the starting point for the next accounting period.

Key Takeaways

• Closing entries reset temporary accounts (revenue, expenses, dividends) to zero at period end.
• Four steps: close revenue to Income Summary, close expenses to Income Summary, close Income Summary to Retained Earnings, close dividends to Retained Earnings.
• Income Summary is a temporary holding account used only during closing.
• The post-closing trial balance contains only permanent accounts and serves as the starting point for the next period.
• Without closing entries, current-period income would be added to next-period income, distorting all future financial statements.

What’s Next

In Lesson 6, you will explore subsidiary ledgers and special journals — the tools that handle high-volume transactions without cluttering the general journal and general ledger.

  借：服務收入       $7,700
  貸：損益彙總       $7,700

  借：損益彙總       $4,300
  貸：租金費用       $2,000
  貸：保險費用       $1,000
  貸：薪資費用         $800
  貸：折舊費用         $500

  借：損益彙總       $3,400
  貸：保留盈餘       $3,400

  借：保留盈餘       $1,000
  貸：股利           $1,000

  借方：役務収益     $7,700
  貸方：損益         $7,700

  借方：損益         $4,300
  貸方：地代家賃     $2,000
  貸方：保険費用     $1,000
  貸方：給与費用       $800
  貸方：減価償却費     $500

  借方：損益         $3,400
  貸方：利益剰余金   $3,400

  借方：利益剰余金   $1,000
  貸方：配当         $1,000