Closing Entries Accounting Example

Closing entries are made at the end of an accounting period to transfer balances from temporary accounts such as revenues, expenses, and dividends to permanent accounts such as retained earnings. This procedure resets the balance of the temporary accounts to zero for the next accounting period.

Here are some detailed examples of closing entries:

Example 1: Closing Revenue Accounts

Scenario: At the end of the accounting period, your business has a total revenue of $100,000.

Journal Entry:

Date	Account Title	Debit ($)	Credit ($)
12-31-2024	Sales Revenue A/c Debit	100,000
12-31-2024	To Income Summary A/c		100,000

Explanation:

• Sales Revenue will debited to close the account and bring the balance to zero.
• Income Summary will credited to transfer the revenue to the income summary account.

Example 2: Closing Expense Accounts

Scenario: At the end of the accounting period, your business total expenses of $70,000, including rent, salaries, and utilities.

Journal Entry:

Date	Account Title	Debit ($)	Credit ($)
12-31-2024	Income Summary A/c Debit	70,000
12-31-2024	To Rent Expense A/c		20,000
12-31-2024	To Salaries Expense A/c		40,000
12-31-2024	To Utility Expense A/c		10,000

Explanation:

• Income Summary will debited to transfer the total expenses to the income summary account.
• Rent expenses, salary expenses, and utility expenses are credited to close these accounts and bring their balances to zero.

Example 3: Closing the Income Summary Account

Scenario: After closing the revenue and expense accounts, the balance in the income summary account shows a net income of $30,000.

Journal Entry:

Date	Account Title	Debit ($)	Credit ($)
12-31-2024	Income Summary A/c Debit	30,000
12-31-2024	To Retained Earnings A/c		30,000

Explanation:

• Income Summary will debited to close the account.
• Retained earnings will be credited to be transferred to the retained earnings account, which will increase the equity of the business.

Example 4: Closing Dividends (if any)

Scenario: During the year, your business declared dividends of $5,000.

Journal Entry:

Date	Account Title	Debit ($)	Credit ($)
12-31-2024	Retained Earnings A/c Debit	5,000
12-31-2024	To Dividends A/c		5,000

Explanation:

• Retained earnings will be debited to transfer the dividends declared to the retained earnings account.
• Dividends will be credited to close the dividends account and bring its balance to zero.

These closing entries ensure temporary accounts are reset to zero and the net income or loss is transferred to the retained earnings account. This prepares the accounts for the next accounting period and helps in maintaining accurate financial records.