Closing Entry
A closing entry is a journal entry made at the end of an accounting period that transfers balances from temporary accounts (revenue, expenses, and draws) to permanent accounts (retained earnings). It resets all income and expense accounts to zero so the next period starts fresh. Think of it as "arch
Closing Entry Definition
A closing entry is a journal entry made at the end of an accounting period that transfers balances from temporary accounts (revenue, expenses, and draws) to permanent accounts (retained earnings). It resets all income and expense accounts to zero so the next period starts fresh. Think of it as "archiving" the current period's results into your cumulative equity.
Closing Entry in Practice — Example
Your small retail store's fiscal year ends December 31st. For the year, you earned $200,000 in revenue and incurred $150,000 in expenses. At year-end, you make closing entries: debit Revenue $200,000 and credit Income Summary $200,000 (closing revenue). Debit Income Summary $150,000 and credit Expenses $150,000 (closing expenses). Then debit Income Summary $50,000 and credit Retained Earnings $50,000 (transferring net income to equity). All revenue and expense accounts are now at zero for January 1st.
Why Closing Entry Matters for Your Books
Without closing entries, revenue and expense balances would accumulate indefinitely. Your P&L would show all-time totals instead of current-period performance. Closing entries ensure each period's P&L reflects only that period's activity.
Closing entries also update retained earnings on the balance sheet. Retained earnings represents accumulated profits (or losses) over the life of the business. Each year's net income flows into retained earnings through the closing process, connecting the P&L to the balance sheet.
For business owners who take draws (distributions), closing entries also transfer the draws account to equity, reducing retained earnings by the amount distributed. This keeps owner compensation properly reflected in the equity section.
How Closing Entry Shows Up in QuickBooks
Here's the good news: QBO handles closing entries automatically. At the end of each fiscal year, QBO transfers net income to Retained Earnings without you lifting a finger. You can see this on the Balance Sheet — prior-year net income rolls into Retained Earnings on the first day of the new fiscal year. If you need to make manual closing entries (for draws or special adjustments), use New → Journal Entry and tag it as an adjusting entry.
Common Mistakes
FAQ
Q: Do I need to make closing entries in QuickBooks? A: No — QBO handles year-end closing automatically. You just need to make sure your books are clean and all adjusting entries are in place before year-end.
Q: What's the difference between a closing entry and an adjusting entry? A: Adjusting entries update account balances for accuracy (like accruals and depreciation). Closing entries transfer temporary account balances to retained earnings, resetting them to zero for the new period.
Related Terms
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A key accounting concept that helps businesses track and manage their financial information effectively.
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