Adjusting entries Updated November 2026

Closing entries

Closing entries zero out the temporary accounts (revenues, expenses, dividends or drawing) and move their net effect into Retained Earnings or Owner's Capital. The four steps: debit each revenue and credit Income Summary; debit Income Summary and credit each expense; close Income Summary (net income) to Retained Earnings; close Dividends to Retained Earnings.

Syntax

1) Dr Revenues / Cr Income Summary; 2) Dr Income Summary / Cr Expenses; 3) Dr Income Summary / Cr Retained Earnings (net income); 4) Dr Retained Earnings / Cr Dividends

Part	What it is
`Income Summary`	Temporary clearing account used only during closing; its balance after steps 1 and 2 equals net income (credit) or net loss (debit).
`Retained Earnings / Owner's Capital`	Permanent equity account that receives net income and absorbs dividends or drawings.
`Dividends / Owner's Drawing`	Temporary account closed directly to equity, not through Income Summary.

Examples

Dr Service Revenue 90,000 / Cr Income Summary 90,000

Result: Revenue account now zero

Step 1 closes all revenue accounts.

Dr Income Summary 60,000 / Cr Rent Expense 12,000, Cr Wages Expense 40,000, Cr Supplies Expense 8,000

Result: Expense accounts zero; Income Summary has a 30,000 credit balance

Step 2 closes all expenses in one compound entry.

Dr Income Summary 30,000 / Cr Retained Earnings 30,000

Result: Net income of 30,000 added to retained earnings

Step 3. For a net loss the entry is reversed: Dr Retained Earnings / Cr Income Summary.

Dr Retained Earnings 10,000 / Cr Dividends 10,000

Result: Dividends account zero; retained earnings up 20,000 net for the year

Step 4 closes dividends directly, not through Income Summary.

Common mistakes

Closing balance sheet accounts: Cash, Equipment, Accounts Payable and the like are permanent and carry forward; only income statement accounts and dividends are closed.
Closing Dividends through Income Summary: dividends are not an expense and go straight to Retained Earnings.
Closing before adjusting entries are posted: adjust first, then prepare the adjusted trial balance and statements, then close.

Practice Closing entries

These drills check your answer on live data, free, no account needed.

Closing revenuesHilltop Pet Sitting, Inc. closes its books through Income Summary. At year end, before closing, Service Revenue has a credit balance of $58,400 and Interest Revenue has a credit balance of $260. Record the entry that closes the revenue accounts.

Questions

Which accounts are closed at year end?

All revenue accounts, all expense accounts, Income Summary and Dividends (or Owner's Drawing). These are the temporary accounts.

What is the Income Summary account?

A temporary account used only during closing to collect revenues and expenses. Its balance equals net income or loss and is then transferred to Retained Earnings.

What does the post-closing trial balance contain?

Only permanent accounts: assets, liabilities and equity. All temporary accounts show zero.

Retained earningsWhat retained earnings are, how net income and dividends change them, the closing entries that post to the account, the formula and what a deficit means.
Trial balanceA trial balance lists every ledger balance and checks that debits equal credits. Steps to prepare it, a worked example and how to find the error.
Owner withdrawal and dividendsHow to record an owner drawing cash (Dr Owner's Drawing, Cr Cash) and a corporation declaring and paying dividends (Dr Dividends, Cr Dividends Payable).
Depreciation entryHow to record depreciation: Dr Depreciation Expense, Cr Accumulated Depreciation. Straight-line formula, monthly and annual examples and book value.