Closing Entries: What They Are and How to Record Them
Closing entries zero out temporary accounts at the end of a period and move net income to retained earnings. Here is what closing entries are, the four steps, examples, and how AI agents automate them.
At the end of every accounting period, the books have to be reset so the next period starts clean. Closing entries are how that happens: they zero out the temporary accounts, revenues, expenses, and dividends or draws, and roll the period's net result into retained earnings. They are one of the last steps in the accounting cycle, and they are almost entirely mechanical, which is exactly why they are ripe for automation.
This guide explains what closing entries are, which accounts they affect, the four steps to record them, and how AI agents handle them at close.
What are closing entries?
Closing entries are journal entries made at the end of an accounting period to transfer the balances of temporary accounts to a permanent account, retained earnings (for a corporation) or owner's equity. After closing, the temporary accounts start the next period at zero, so each period measures only its own activity.
The logic is simple: revenues and expenses measure performance for one period, so they have to reset to zero before the next one begins. Closing entries sweep those balances into equity, where the cumulative result lives permanently.
Temporary vs. permanent accounts
- Temporary (nominal) accounts track activity for a single period and get closed: revenues, expenses, gains, losses, and dividends/withdrawals.
- Permanent (real) accounts carry their balances forward across periods and are never closed: assets, liabilities, and equity, including retained earnings.
The four closing entries
Closing is traditionally done in four steps, often using a temporary clearing account called Income Summary:
- 1. Close revenue accounts. Debit each revenue account for its balance and credit Income Summary. This zeroes out revenue.
- 2. Close expense accounts. Credit each expense account for its balance and debit Income Summary. This zeroes out expenses.
- 3. Close Income Summary to retained earnings. The balance in Income Summary now equals net income (or net loss). Transfer it to retained earnings, debit Income Summary and credit Retained Earnings for a profit (reverse for a loss).
- 4. Close dividends or draws. Credit the Dividends (or Owner's Draw) account and debit Retained Earnings, removing distributions from equity.
Some systems skip the Income Summary account and close revenues and expenses directly to retained earnings; the result is the same.
A worked example
Say a company ends the period with $500,000 in revenue, $380,000 in total expenses, and $20,000 in dividends.
| Step | Debit | Credit |
|---|---|---|
| 1. Close revenue | Revenue $500,000 | Income Summary $500,000 |
| 2. Close expenses | Income Summary $380,000 | Expenses $380,000 |
| 3. Close to retained earnings | Income Summary $120,000 | Retained Earnings $120,000 |
| 4. Close dividends | Retained Earnings $20,000 | Dividends $20,000 |
After these entries, revenue, expenses, and dividends are all zero, Income Summary is zero, and retained earnings has increased by the $100,000 net addition ($120,000 net income less $20,000 dividends).
Where closing entries fit in the accounting cycle
Closing entries come near the end of the cycle, after the adjusted trial balance and financial statements are prepared, and produce the post-closing trial balance, which should contain only permanent accounts. They are distinct from adjusting entries (which record accruals and deferrals before the statements) and from reversing entries (optional entries that open the next period).
How AI agents automate closing entries
Closing entries are rules-based and repetitive, the same sweep of the same account types, every single period. That makes them one of the most automatable steps in the close. An AI agent can identify the temporary accounts and their balances, generate the closing entries, post them to the ERP, and produce the post-closing trial balance, with a human reviewing before anything is finalized.
This is part of the broader shift to financial close automation: agents handle the mechanical entries, so accountants spend their time on judgment and review rather than keying the same closing entries each month. See also our guide to journal entry automation.
Frequently asked questions
What are closing entries?
Closing entries are journal entries made at period-end to transfer the balances of temporary accounts, revenues, expenses, and dividends, to a permanent equity account (retained earnings). They reset the temporary accounts to zero so the next period measures only its own activity.
What are the four closing entries?
Close revenues to Income Summary; close expenses to Income Summary; close Income Summary (now equal to net income or loss) to retained earnings; and close dividends or owner's draws to retained earnings. After these four steps, all temporary accounts are zero.
Which accounts are closed?
Only temporary accounts are closed: revenues, expenses, gains, losses, and dividends or withdrawals. Permanent accounts, assets, liabilities, and equity, are never closed; their balances carry forward to the next period.
What is the difference between closing entries and adjusting entries?
Adjusting entries are made before the financial statements to record accruals, deferrals, and estimates for the period. Closing entries come after the statements are prepared and reset the temporary accounts to zero for the next period. Adjusting entries affect the statements; closing entries prepare the books for the new period.
The bottom line
Closing entries are the mechanical reset at the end of the accounting cycle: sweep revenues, expenses, and dividends into retained earnings so temporary accounts start the next period at zero. The four-step process is identical every period, which is why it is among the first things finance teams automate.
If you want the close, including the closing entries, run by AI agents with a human approving and every entry traceable to source, talk to our team.
