Closing Entries: Revenues, Expenses and Dividends

Why accounts are closed

Revenue, expense and dividend (or drawings) accounts measure what happened during one period. Net income for 2026 should not include the sales of 2025. So at the end of each year, after the adjusting entries, these temporary accounts are reset to zero and their net effect is transferred to equity. The entries that do this are the closing entries.

Permanent accounts (assets, liabilities, Capital, Common Stock, Retained Earnings) are not closed: their balances carry forward and become the opening balances of the next year.

The four closing steps (US convention)

US textbooks close the books through a temporary account called Income Summary:

1. Close revenues: debit each revenue account for its balance and credit Income Summary for the total.
2. Close expenses: debit Income Summary for the total and credit each expense account for its balance.
3. Close Income Summary: its balance is now the net income (credit balance) or net loss (debit balance). Transfer it to Retained Earnings in a corporation, or to the owner’s Capital account in a sole proprietorship.
4. Close Dividends or Drawings directly to Retained Earnings or Capital. They never pass through Income Summary, because they are not expenses.

Worked example

A corporation has these balances on December 31, after adjustments:

Account	Debit balance	Credit balance
Service Revenue		9,000
Salaries Expense	4,000
Rent Expense	1,500
Depreciation Expense	500
Dividends	1,000

Net income is 9,000 − 4,000 − 1,500 − 500 = $3,000.

Step 1: close the revenue account

Account	Debit	Credit
Service Revenue	9,000
Income Summary		9,000

Step 2: close the expense accounts

Account	Debit	Credit
Income Summary	6,000
Salaries Expense		4,000
Rent Expense		1,500
Depreciation Expense		500

Income Summary now has a credit balance of 9,000 − 6,000 = $3,000: the net income.

Step 3: close Income Summary to Retained Earnings

Account	Debit	Credit
Income Summary	3,000
Retained Earnings		3,000

For a net loss, the entry is reversed: debit Retained Earnings, credit Income Summary.

Step 4: close Dividends

Account	Debit	Credit
Retained Earnings	1,000
Dividends		1,000

Retained Earnings rises by the net income ($3,000) and falls by the dividends ($1,000), a net increase of $2,000. All five temporary accounts now have a zero balance.

In a sole proprietorship

The same steps apply with the owner’s Capital account in place of Retained Earnings. Step 3 credits Capital for the net income, and step 4 debits Capital and credits Drawings for the amount the owner withdrew during the year.

Checking the closing entries

• After closing, every revenue, expense and dividend or drawings account has a zero balance.
• Income Summary also ends at zero.
• The change in Retained Earnings (or Capital) equals net income minus dividends (or drawings), plus any new investment by the owner.
• A post-closing trial balance lists only permanent accounts, and its debit and credit totals are equal (see the trial balance guide).

Some textbooks skip Income Summary and close revenues and expenses directly to Retained Earnings. The result is the same; only the number of entries differs.

Before closing: inventory under a periodic system

The US convention on PractiBalance uses a perpetual inventory system: Cost of Goods Sold is recorded at each sale, so it is already a normal expense account at year end and closes with the others. Only a shrinkage adjustment may be needed if the physical count is lower than the Inventory account (debit Cost of Goods Sold, credit Inventory). Under a periodic system, cost of goods sold is calculated at year end from the opening inventory, the purchases and the closing count, and that calculation is recorded before or within the closing entries.

How the other conventions close the year

The principle is the same, but the accounts differ:

• Spain (PGC): there is no Income Summary. The balances of groups 6 (expenses) and 7 (revenue) are transferred directly to 129 Resultado del ejercicio, after the year-end entries in 610 Variación de existencias de mercaderías. The profit is distributed the following year by the shareholders’ meeting, for example to 112 Reserva legal, 113 Reservas voluntarias and 526 Dividendo activo a pagar. In a sole proprietorship, 550 Titular de la explotación records the owner’s withdrawals.
• France (PCG): classes 6 and 7 are closed to account 12, which shows 120 Résultat de l’exercice (bénéfice) or 129 Résultat de l’exercice (perte). The appropriation of the profit is recorded after the general meeting: 1061 Réserve légale, 457 Associés - Dividendes à payer, 110 Report à nouveau. A sole proprietor’s withdrawals are in 108 Compte de l’exploitant.
• Germany: expense and revenue accounts are closed to the profit and loss account (GuV-Konto), whose balance is the profit or loss. In a sole proprietorship it is transferred to Eigenkapital, and the drawings account (Privatentnahmen) is closed to Eigenkapital too. All balance sheet accounts are then closed to the Schlussbilanzkonto.

Practice

The adjusting and closing and corporations and equity families include closing and dividend items. Definitions of income summary, retained earnings, dividend and drawings are in the glossary.