Learn the closing-entry procedure step by step with T-account supports
Every account in the ledger belongs to one of two teams. Understanding which team an account is on tells you whether it needs to be closed at the end of the period.
Reset to $0 at the end of each period.
- • All Revenue accounts (Service Revenue, Interest Revenue, etc.)
- • All Expense accounts (Rent, Salaries, Supplies, Depreciation, etc.)
- • Dividends (or Owner's Drawings)
Think of these as the "scoreboard" for one game. After the game ends, the scoreboard resets for the next game.
Carry forward — their balances continue into the next period.
- • All Asset accounts (Cash, Accounts Receivable, Equipment, etc.)
- • All Liability accounts (Accounts Payable, Notes Payable, etc.)
- • All Equity accounts (Common Stock, Retained Earnings)
Think of these as the "season standings." They accumulate over time and never reset.
Closing entries always follow the same four steps. The order matters because each step feeds into the next. We'll use Sarah's March adjusted balances to walk through each step.
Close Revenue Accounts to Income Summary
Revenue accounts have credit balances. To zero them out, we debit each revenue account and credit Income Summary.
DR Service Revenue ............ $8,700
CR Income Summary ............ $8,700
Service Revenue is now $0. Income Summary has a credit of $8,700.
Close Expense Accounts to Income Summary
Expense accounts have debit balances. To zero them out, we credit each expense account and debit Income Summary for the total.
DR Income Summary ............ $4,695
CR Rent Expense ............ $1,500
CR Salaries Expense ............ $2,800
CR Depreciation Expense ............ $75
CR Supplies Expense ............ $320
All expense accounts are now $0. Income Summary: $8,700 CR − $4,695 DR = $4,005 CR (net income).
Close Income Summary to Retained Earnings
Income Summary now holds the net income of $4,005 as a credit balance. To close it, we debit Income Summary and credit Retained Earnings.
DR Income Summary ............ $4,005
CR Retained Earnings ............ $4,005
Income Summary is now $0. Retained Earnings increased by $4,005.
Close Dividends to Retained Earnings
Dividends have a debit balance. To close, we creditDividends and debit Retained Earnings. (If Sarah paid no dividends in March, this step is skipped.)
DR Retained Earnings ............ $500
CR Dividends ............ $500
Dividends is now $0. Retained Earnings decreased by $500.
Visualizing with T-Accounts
T-accounts make it easy to see how closing entries zero out temporary accounts. Here's what Income Summary looks like after all four steps:
Common Mistake
Students sometimes close revenue directly to Retained Earnings, skipping Income Summary. While the final Retained Earnings number would be the same, GAAP requires the Income Summary step because it creates a clear audit trail showing exactly how net income was calculated during the closing process.