Year-end closing entries are critical in accounting because they ensure that all temporary accounts (revenues, expenses, profits, and losses) are closed to retained earnings or owner’s equity accounts. This process resets these accounts to zero in preparation for the next accounting period and updates the retained earnings account with the net income or loss for the year.
Here are several examples of year-end closing entries:
Example 1: Closing Revenue Accounts
Scenario: At the end of the year, your business has recorded $100,000 in total revenue.
Journal Entry:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 12-31-2024 | Revenue A/c Debit | 100,000 | |
| 12-31-2024 | To Retained Earnings A/c | 100,000 |
Explanation:
- Revenue will debited to close out the revenue account.
- Retained Earnings will credited to transfer the revenue balance to equity.
Example 2: Closing Expense Accounts
Scenario: The total expenses for the year amount to $70,000.
Journal Entry:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 12-31-2024 | Retained Earnings A/c Debit | 70,000 | |
| 12-31-2024 | To Expenses A/c | 70,000 |
Explanation:
- Retained Earnings will debited to reflect the expenses reducing equity.
- Expenses will credited to close out the expense accounts.
Example 3: Closing the Income Summary Account
Scenario: After closing the revenue and expense accounts, the income summary shows a net income of $30,000 (Revenue $100,000 – Expenses $70,000).
Journal Entry:
| Date | Account Title | Debit ($) | 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 out the account.
- Retained Earnings will credited to reflect the net income being added to equity.
Example 4: Closing Dividend Account
Scenario: During the year, the business declared and paid $10,000 in dividends.
Journal Entry:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 12-31-2024 | Retained Earnings A/c Debit | 10,000 | |
| 12-31-2024 | To Dividends A/c | 10,000 |
Explanation:
- Retained Earnings will debited to reduce equity by the amount of dividends paid.
- Dividends will credited to close out the dividend account.
Example 5: Adjusting for Depreciation Expense
Scenario: At the end of the year, the business calculates $5,000 in depreciation expense.
Journal Entry:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 12-31-2024 | Depreciation Expense A/c Debit | 5,000 | |
| 12-31-2024 | To Accumulated Depreciation A/c | 5,000 |
Explanation:
- Depreciation Expenses will be debited to recognize the expense for the year.
- Accumulated depreciation will be credited to update the contra-asset account.
Example 6: Closing Interest Income
Scenario: The business earned $2,000 in interest income during the year.
Journal Entry:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 12-31-2024 | Interest Income A/c Debit | 2,000 | |
| 12-31-2024 | To Retained Earnings A/c | 2,000 |
Explanation:
- Interest Income will debited to close the account.
- Retained Earnings will credited to transfer the interest income to equity.
Example 7: Closing Cost of Goods Sold (COGS)
Scenario: The business recorded $50,000 in COGS for the year.
Journal Entry:
| Date | Account Title | Debit ($) | Credit ($) |
|---|---|---|---|
| 12-31-2024 | Retained Earnings A/c Debit | 50,000 | |
| 12-31-2024 | To Cost of Goods Sold A/c | 50,000 |
Explanation:
- Retained Earnings will debited to reflect the COGS reducing equity.
- Cost of Goods Sold will credited to close the account.
These entries ensure all temporary accounts are closed, and the balances are transferred to retained earnings, updating the equity section of the balance sheet. This process prepares accounts for the next financial year, allowing the business to start fresh with zero balances in its income and expense accounts.