Closing Entries in Accounting: What Happens at Period End
Quick answer: Closing entries are journal entries recorded at end of an accounting period that zero out all revenue, expense, and dividend accounts by transferring their balances into retained earnings. The purpose is to reset temporary accounts to zero so next period starts clean. QuickBooks Online handles this automatically but understanding what's happening underneath matters when something goes wrong.
Every revenue and expense account in your chart of accounts is temporary. It accumulates activity for one period a month, a quarter, a year and then resets to zero before next period begins.
That reset is what closing entries do.
If you don't close your books, January's revenue rolls into February. February's expenses stack on top of January's. By December, your income statement shows cumulative numbers for entire year instead of monthly performance. Your financial statements become unreadable, and your trial balance is a mess.
Most accounting software automates this. QuickBooks Online does it behind scenes at year-end. But if you're managing client books, reviewing financials, or troubleshooting a retained earnings discrepancy, you need to know what a closing entry actually is and how accounting closing entries process works.
What is a closing entry
A closing entry is a journal entry that transfers balance of a temporary account to a permanent account at end of an accounting period. That's textbook definition from GAAP.
In practice: revenue accounts, expense accounts, and owner's drawing/dividends account all get zeroed out. Their balances move into retained earnings (for corporations) or owner's equity (for sole proprietors). After closing entries are posted, every temporary account has a $0 balance and is ready for next period.
The permanent accounts assets, liabilities, equity don't get closed. Their balances carry forward. That's why they're called permanent. Your cash balance on December 31 is your cash balance on January 1. Your loan balance doesn't reset. Only income statement accounts reset.
Temporary vs. permanent accounts
What are closing entries: four closing journal entries
The closing process follows four steps. Every accounting textbook teaches these in same order because each step feeds next.
Step 1: Close revenue accounts to Income Summary
Every revenue account gets debited to zero. The total credits go to an intermediary account called Income Summary.
Example: Your company earned $80,000 in service revenue and $15,000 in product revenue during year.
After this entry, all expense accounts are at $0. Income Summary now has: $95,000 (credit from Step 1) minus $80,000 (debit from Step 2) = $15,000 credit balance. That $15,000 is net income for period.
Step 3: Close Income Summary to Retained Earnings
Transfer net income (or net loss) from Income Summary to Retained Earnings.
After all four closing journal entries, net effect on Retained Earnings is: +$15,000 (net income) minus $5,000 (dividends) = +$10,000. That's growth in owner equity for period.
Closing entries t-accounts
For visual learners here's how same closing entries look in T-account format.
The T-account view makes flow visible: revenue and expenses funnel through Income Summary, which funnels into Retained Earnings. After posting, every temporary account reads zero.
How QuickBooks Online handles closing entries
Here's what most guides skip: QuickBooks Online automates closing entries. You don't manually post four entries above. QBO handles it at fiscal year-end by:
- Automatically zeroing out revenue and expense accounts
- Transferring net income to Retained Earnings
- Starting new fiscal year with $0 in all temporary accounts
You won't see these entries in transaction log. QBO computes them on fly when you run reports. If you pull a Balance Sheet as of January 1, Retained Earnings already reflects prior year's net income. If you pull a P&L for January, it shows only January activity.
What you do need to do manually:
Lock closing date. After year-end, go to Settings > Account and Settings > Advanced > Accounting and set a closing date. This prevents anyone from accidentally editing transactions in closed period. Set a password for extra security.
Post adjusting entries before closing. Closing entries come after all adjustments are made depreciation, prepaid amortization, accrued expenses. If you close first and adjust later, your retained earnings will be wrong until you edit closed books.
Reconcile everything first. Bank reconciliation, credit card reconciliation, and balance sheet reconciliation all need to happen before closing entries. You're locking a period. Make sure data in that period is right before you lock it.
Month end vs. year end closing
QBO automates year-end closing entries only. For monthly P&L reporting, QBO filters transactions by date range it doesn't post monthly closing entries. This is fine for reporting purposes, but it means that if someone edits a January transaction in March, January's P&L changes retroactively.
For firms aiming for a zero-day close, monthly closing discipline means locking closing date monthly, not just annually. Lock January on February 5 (or whenever your close completes). Lock February on March 5. This prevents retroactive edits from corrupting prior-period financials.
Closing entries and accounting cycle
Closing entries are step 8 in standard accounting cycle. Here's where they fit:
- Record transactions (journal entries)
- Post to general ledger
- Prepare an unadjusted trial balance
- Record adjusting entries
- Prepare an adjusted trial balance
- Generate financial statements (income statement, balance sheet)
- Record closing entries ← you are here
- Prepare a post-closing trial balance
The post closing trial balance should only contain permanent accounts (assets, liabilities, equity) all with correct balances. If any temporary accounts still have a balance, a closing entry was missed or posted incorrectly.
Common closing entry mistakes
Closing before adjustments are posted. If depreciation, accrued expenses, or prepaid expense amortization entries haven't been recorded, closing entries will transfer incorrect net income to retained earnings. Always complete adjusting entries first.
Forgetting to close dividends account. Steps 1-3 get done. Step 4 gets skipped. The result: retained earnings is overstated by dividend amount, and dividends account carries a balance into next period.
Editing closed periods without adjusting closing entries. If someone edits a transaction in a closed period (adds an expense, changes a revenue amount), closing entry that transferred that period's net income is now wrong. In QBO, this is handled automatically if closing date is reset. In manual accounting systems, you'd need to reverse and re-record closing entries.
Confusing closing entries with adjusting entries. Adjusting entries update account balances to reflect reality (accruals, deferrals, depreciation). Closing entries reset temporary accounts to zero. Adjusting entries happen before closing. Closing happens after. They're sequential, not interchangeable.
How Finlens handles period end closing
Finlens automates month end close workflow including adjusting entries that precede closing. Recurring adjustments depreciation schedules, prepaid amortization, accrued expense templates post automatically at period end. Once adjustments are complete, period locks and closing entries are processed.
For accounting firms managing multiple clients, this means close sequence (reconcile → adjust → close → lock) runs consistently across every client without manual intervention on routine entries. The bookkeeper reviews exceptions. The system handles repeatable work.
FAQ
What are closing entries?
Closing entries are journal entries recorded at end of an accounting period that transfer balances of temporary accounts (revenue, expenses, dividends) into retained earnings. They reset temporary accounts to zero so next period starts clean.
What is a closing entry in accounting?
A closing entry in accounting is a journal entry that zeroes out a temporary account by moving its balance to a permanent equity account (retained earnings or owner's equity). The four closing journal entries close revenue, expenses, income summary, and dividends in that order.
Does QuickBooks make closing entries automatically?
Yes. QuickBooks Online automatically transfers net income to retained earnings at fiscal year-end. You won't see manual closing journal entries in transaction log. QBO computes them when you run reports. You still need to set a closing date and lock period.
What's difference between closing entries and adjusting entries?
Adjusting entries update account balances before financial statements are prepared (recording depreciation, accruals, prepaids). Closing entries zero out temporary accounts after financial statements are prepared. Adjustments happen first. Closing happens after.
What accounts are affected by closing entries?
All temporary accounts: revenue accounts, expense accounts, and dividends/owner's draws account. These are debited or credited to zero. The offsetting entry goes to Income Summary, which then gets closed to Retained Earnings (a permanent equity account).
Do I need to make closing entries monthly?
In QBO, not manually software handles date-range reporting automatically. But you should lock closing date monthly to prevent retroactive edits. For manual accounting systems, monthly closing entries are necessary if you want clean period-over-period comparisons.
What is Income Summary?
Income Summary is a temporary intermediary account used during closing process. Revenue balances are transferred into it, then expense balances are transferred out of it, leaving net income (or loss). That net figure is then closed to Retained Earnings. After closing, Income Summary has a $0 balance.
