What is Closing Journal Entry?

A closing journal entry is a type of entry made at the end of an accounting period to transfer balances from temporary accounts to permanent accounts.

Temporary accounts, such as revenue, expenses, and dividends, are closed to reset their balances to zero, and their balances are then transferred to permanent accounts, such as retained earnings.

closing journal entry

This process is essential for preparing the accounts for the next accounting period.

The entry typically involves debiting and crediting various accounts to achieve the necessary transfers.

Automated accounting software can generate closing entries automatically to streamline the process. Permanent accounts, such as asset, liability, and equity accounts, do not require closing entries.

Journal Entry – General Info

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Revenue Accounts

A revenue accounts closing journal entry is a type of closing entry made at the end of an accounting period to reset temporary accounts to zero and transfer their balances to permanent accounts on the balance sheet.

The basic sequence of closing entries involves debiting all revenue accounts and crediting the income and expense summary account, then closing the income summary account to the retained earnings account.

This process ensures that the temporary revenue accounts are ready to accumulate new transactions in the next period.

Closing revenue:

Debit: Revenue - Sales                 $100,000
Credit:       Income and Expense Summary Account             $100,000

Closing Income Summary Account:

Debit: Income Summary Account          $100,000
Credit:       Retained Earnings                  $100,000

Closing Inventory

The closing inventory journal entry is a crucial part of the accounting process that involves recording the value of the ending inventory at the end of an accounting period.

This entry is necessary to carry the ending inventory balance forward to the next accounting period.

The journal entry typically includes debiting the closing inventory account and crediting the income summary account for the same amount.

This process allows the temporary accounts on the income statement, such as the inventory account, to be closed and the balances transferred to permanent accounts on the balance sheet.

The specific journal entry may vary based on the accounting system used, but it generally follows this principle.

To close beginning Inventory:

Debit: Cost of Goods Sold                  $20,000
Credit:        Merchandise Inventory                $20,000

Expense Accounts

An expense account closing journal entry is a crucial step in the accounting cycle that involves transferring the debit balances in a company’s expense accounts to the income summary.

This process helps reset the temporary accounts, such as revenue and expenses, to zero for the next accounting period.

The entry is typically made by crediting the expense accounts and debiting the income summary.

By doing this, the company can determine its net income or retained earnings for the current accounting period and ensure that the expense accounts are ready to receive data for the next period.

All expenses in the income statement are credited and closed to the income and expense summary account.

Closing Entries Combined

Here are the closing entries combined:

Debit: Revenue - Sales                           $100,000
Credit:       Income and Expense Summary Account             $100,000


Debit: Income and Expense Summary Account         $64,000     
Credit:           Salaries and Wages                         $50,000
                  Rent Expenses                              $10,000
                  Utilities Expenses                          $3,000
                  Miscellaneous Expenses                      $1,000

Net amount = $36,000 is closed to Retained Earnings

Debit:     Income and Expense Summary              $34,000
Credit:               Retained Earnings                     $34,000

Every December

A closing entry is a journal entry made at the end of the accounting period (Every December) to transfer balances from temporary accounts to permanent accounts.

Temporary accounts, such as revenue, expenses, and dividends, are closed to reset their balances to zero, while permanent accounts, including assets, liabilities, and owner’s equity, are not closed and their balances are carried forward to the next accounting period.

The purpose of closing entries is to prepare the temporary accounts for the next accounting period and to ensure that all income statement balances are eventually transferred to retained earnings.

The closing entry is part of the accounting cycle and is performed after the adjusting entries.

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