To close out expense accounts, credit each expense account on your adjusted trial balance for its full balance and post a single offsetting debit to Income Summary for the total. That one journal entry, dated the last day of the period, brings every expense account to zero and parks the combined spending in Income Summary, where it will be netted against revenue and moved into equity. Everything else is preparation and verification.
Where Expense Closing Fits in the Sequence
Expense accounts are temporary. They track spending during a single period and must reset to zero before the next one begins. Revenue accounts, dividend accounts, and owner draw accounts work the same way. Assets, liabilities, and equity are permanent and carry forward.
The full close runs in four steps, and the order matters:
- Close revenue accounts into Income Summary.
- Close expense accounts into Income Summary.
- Close Income Summary into Retained Earnings or Owner’s Capital.
- Close dividends or owner draws directly into Retained Earnings or Owner’s Capital.
Revenue is closed first because it puts a credit balance into Income Summary. Expenses come next and put a debit against it. The difference is your net income or net loss, which Income Summary holds briefly before the balance moves to equity. Doing step two before step one leaves you looking at a debit-only Income Summary balance that will not make sense until the revenue side arrives.
Pull the Numbers From the Adjusted Trial Balance
Do not touch a closing entry until the adjusted trial balance is finished. That is the version of the trial balance that already reflects end-of-period adjustments for depreciation, prepaid expenses that have been consumed, and accrued obligations you have not yet been invoiced for. If those adjusting entries have not posted, your closing entry will lock in wrong numbers.
Scan the report and separate temporary accounts from permanent ones. Anything with “expense,” “revenue,” “income,” “dividends,” or “draws” in its name is temporary. Cash, receivables, equipment, payables, and retained earnings stay put.
For payroll-related expense accounts, confirm the balances include employer-side taxes. The employer’s share of Social Security is 6.2 percent of wages up to $184,500 in 2026, and Medicare is 1.45 percent with no cap.1Internal Revenue Service. Topic No. 751, Social Security and Medicare Withholding Rates2Social Security Administration. What Is the Current Maximum Amount of Taxable Earnings for Social Security Those amounts should already sit in a payroll tax expense account. If they do not, post the adjusting entry before you close.
Write the Closing Entry
Each expense account carries a debit balance during the period. To zero it out, you credit it for the full balance. The offsetting entry is a single debit to Income Summary equal to the combined total of every expense account being closed.
Say the adjusted trial balance shows these year-end balances:
- Rent Expense: $48,000
- Salaries Expense: $120,000
- Payroll Tax Expense: $9,180
- Utilities Expense: $6,400
- Insurance Expense: $4,200
- Depreciation Expense: $7,500
- Supplies Expense: $3,720
The closing entry credits each of those accounts for the amount shown, taking every one to zero. The debit side is a single line: Income Summary for $199,000. Written out, the journal entry has seven credit lines and one debit line, dated the last day of the fiscal period and labeled as a closing entry.
If your books track dozens of expense accounts, the mechanic does not change. Every expense account gets credited for its balance, and the Income Summary debit is the sum of all those credits. Debits equal credits on the entry itself, which they must.
Mistakes That Corrupt the Entry
Two problems account for most incorrect expense closings, and both live in the adjusted trial balance rather than in the closing entry itself.
The first is missing accruals. If your team worked the last three days of December but payday falls in January, you need an accrued wages adjusting entry before you close. Otherwise Salaries Expense understates what the period actually cost, and net income comes out artificially high.
The second is prepayments that cross period lines. If you paid a full year of insurance in July, only six months belongs in this period’s Insurance Expense; the rest sits in Prepaid Insurance on the balance sheet. The adjusted trial balance should already reflect the split, but this is the single most common place closing entries go wrong. Verify before you post.
What Happens to Income Summary After Expenses Close
Once revenue and expenses are both closed, Income Summary holds the net result. A credit balance is net income; a debit balance is a net loss. The next entry moves that balance into equity, and the account it hits depends on the entity type.
Corporations
With net income, debit Income Summary for its credit balance and credit Retained Earnings. Using the numbers above, if revenue closed at $215,000 and expenses at $199,000, Income Summary carries a $16,000 credit. The entry debits Income Summary $16,000 and credits Retained Earnings $16,000. Income Summary drops to zero, and Retained Earnings grows.
For a net loss, the entry flips: credit Income Summary and debit Retained Earnings.
Sole Proprietorships
The mechanic is identical, but the equity account is Owner’s Capital rather than Retained Earnings. Debit Income Summary and credit Owner’s Capital for net income, or reverse for a net loss.
Partnerships
Partnerships split the Income Summary balance among partners according to their profit-sharing agreement. Without a written agreement, most states default to equal shares. If three partners share profits 3:2:1 and net income is $60,000, Partner A’s capital account receives $30,000, Partner B receives $20,000, and Partner C receives $10,000. The entry debits Income Summary for the full $60,000 and credits each partner’s individual capital account for their share.
More elaborate agreements may allocate salary allowances, then interest on capital balances, and split whatever remains by ratio. The result is the same: Income Summary reaches zero and each partner’s capital account reflects their share of the period.
Dividends and owner draws are handled in a separate closing step and never flow through Income Summary or through expense accounts. They reduce equity directly.
Verify With the Post-Closing Trial Balance
After every closing entry has posted, run a post-closing trial balance. It should contain only permanent accounts: assets, liabilities, and equity. Every temporary account should read zero. If an expense account still shows a balance, something posted incorrectly and needs to be fixed before you open the new period.
Total debits should equal total credits. If they do not, trace the discrepancy back through the closing entries. The usual causes are transposed digits, an expense account that was debited instead of credited, or a closing entry that was journalized in the book but never posted to the ledger.
The post-closing trial balance also supplies the opening balances for the new period, so any error carries forward until you find and fix it.
Keep the Records
The general ledger, journal entries (including your closing entries), and trial balances support items on your tax return, and the IRS requires you to keep records that support any income or deduction for as long as the period of limitations is open.3Internal Revenue Service. Publication 583, Starting a Business and Keeping Records The relevant retention periods:
- Three years is the standard period when you owe additional tax and no special circumstances apply.
- Four years for employment tax records, measured from the date the tax is due or paid, whichever is later.
- Six years if unreported income exceeds 25 percent of the gross income shown on the return.
- Seven years if you claimed a deduction for bad debt or worthless securities.
- Indefinitely if you filed a fraudulent return or failed to file at all.
Keeping everything for at least seven years covers most scenarios, and digital storage makes that cheap compared with being unable to produce records during an audit.3Internal Revenue Service. Publication 583, Starting a Business and Keeping Records
Sloppy closings have a tax consequence beyond confused books. If errors in the closing process lead to misstated income, the IRS can impose an accuracy-related penalty of 20 percent of the underpayment attributable to negligence or disregard of tax rules, which includes failing to make a reasonable attempt to comply.4Office of the Law Revision Counsel. 26 USC 6662 – Imposition of Accuracy-Related Penalty on Underpayments Careful closing entries and the documentation to back them up are the defense.