Closing entries are the journal entries made at the end of an accounting period to zero out temporary accounts and move the period's net income or loss into retained earnings. In Financial Accounting II, they close the books before the next period starts.
Closing entries are the final journal entries in the accounting cycle that reset temporary accounts to zero and transfer the period's results into permanent equity accounts. In Financial Accounting II, you use them after preparing the financial statements so the next accounting period starts clean.
The accounts closed this way are usually revenues, expenses, and dividends or withdrawals. These are temporary accounts because they only track activity for one accounting period. Once the period ends, their balances should not carry forward into the next set of books.
The basic closing process has a pattern. First, revenue accounts are closed into Income Summary or directly into retained earnings, depending on the system being used. Then expense accounts are closed so their balances also return to zero. If the business paid dividends or the owner made withdrawals, those accounts are closed next. After that, the net income or net loss for the period has been moved into retained earnings.
That last step is what ties closing entries to equity. Retained earnings is a permanent account on the statement of stockholders' equity and balance sheet, so it keeps accumulating the business's past profits minus losses and distributions. Closing entries do not erase the company's performance, they move it from the temporary accounts into the permanent equity record where it belongs.
A quick example makes the idea clearer. Suppose a company earned $50,000 in revenue, had $32,000 in expenses, and declared $3,000 of dividends. After closing, revenue and expense accounts are back to zero, dividends are back to zero, and retained earnings reflects the period's net increase of $18,000 before dividends, then the dividend reduction. The point is not to lose the information, but to store it in the right place for the next period.
One common mistake is mixing up closing entries with adjusting entries. Adjusting entries fix account balances before financial statements are prepared, usually for accruals, deferrals, or estimates. Closing entries happen after the statements and after adjustments. Another mistake is thinking permanent accounts are closed too. They are not. Cash, accounts receivable, common stock, retained earnings, and similar accounts stay open from period to period.
Closing entries are what make the accounting cycle loop correctly in Financial Accounting II. Without them, revenues and expenses from last month would still be sitting in the accounts this month, and your new income statement would be polluted by old activity.
That matters because the whole point of periodic reporting is to show performance for one clear time frame. When a professor asks you to prepare a set of statements, compare periods, or explain why an income statement starts at zero each cycle, closing entries are the reason the numbers are separated cleanly.
They also connect the income statement to the statement of stockholders' equity. The net income or net loss from the period does not just disappear after you close the books. It gets transferred into retained earnings, which is part of the company's permanent equity structure and shows up in later reporting.
In this course, closing entries also help you see the difference between temporary accounts and permanent accounts, which is a basic accounting skill that shows up again and again. If you can sort accounts into those two groups, you can follow the accounting cycle more confidently, post entries in the right order, and explain why the post-closing trial balance contains only permanent accounts.
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Visual cheatsheet
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Closing entries exist to clear out temporary accounts at the end of the period. Revenues, expenses, and dividends or withdrawals are temporary because they belong to one accounting period only. If you forget that distinction, it becomes hard to see why the accounts must return to zero before the next cycle starts.
permanent accounts
Permanent accounts stay open after closing entries are posted. Assets, liabilities, and stockholders' equity accounts carry balances forward, so they are not reset to zero. Closing entries move the period's results into retained earnings, which is a permanent equity account, instead of leaving them in the temporary accounts.
adjusting entries
Adjusting entries come before closing entries in the accounting cycle. Adjustments update balances for accruals, deferrals, and estimates so the financial statements are accurate for the period just ended. Closing entries happen after that, using the adjusted balances to reset the temporary accounts and transfer net income or loss.
statement of stockholders' equity
Closing entries feed into the statement of stockholders' equity because net income or net loss gets moved into retained earnings. Dividends also reduce retained earnings after they are closed. If you are tracing how equity changes during the period, closing entries show where those changes come from.
A problem set or quiz question might give you several journal entries and ask which ones are closing entries, or ask you to prepare the closing entry sequence from a trial balance. You may also be asked to identify which accounts become zero after closing and which ones remain on the post-closing trial balance. If the question uses a short scenario, your job is to trace the flow from revenues and expenses into retained earnings and explain why temporary accounts do not carry forward. On written assignments, you might also justify why closing entries come after adjusting entries but before the next period begins.
Adjusting entries and closing entries both appear near the end of the accounting cycle, so they get mixed up a lot. Adjusting entries fix account balances so the financial statements are accurate for the current period, often for accruals or deferrals. Closing entries happen after the statements are prepared and reset only the temporary accounts to zero.
Closing entries are the last journal entries of the accounting period, and they reset temporary accounts so the next period starts clean.
Revenue, expense, and dividend or withdrawal accounts are the main temporary accounts that get closed.
Closing entries move the period's net income or net loss into retained earnings, which is a permanent equity account.
They come after adjusting entries and after financial statements are prepared, not before.
After closing entries, the post-closing trial balance includes only permanent accounts.
Closing entries are the end-of-period journal entries used to zero out temporary accounts and transfer the period's net income or loss into retained earnings. In Financial Accounting II, they mark the end of one accounting cycle and prepare the books for the next one.
The usual accounts closed are revenues, expenses, and dividends or withdrawals. Those are temporary accounts because they track activity for only one accounting period. Permanent accounts like cash, liabilities, and retained earnings stay open.
No. Adjusting entries fix balances before statements are prepared, often for accruals and other timing issues. Closing entries happen after the statements and reset temporary accounts to zero, so the next period starts fresh.
After closing entries are posted, temporary account balances should be zero and the post-closing trial balance should include only permanent accounts. That is how you check that the books are ready for the next accounting period.