To close temporary accounts, post four journal entries at the end of the accounting period: one moves revenue balances into Income Summary, one moves expense balances into Income Summary, one transfers the net result from Income Summary to your equity account, and one closes dividends or owner draws directly to equity. When you’re finished, every revenue, expense, gain, loss, dividend, and draw account should read zero, and the period’s net income or net loss should be sitting inside retained earnings or owner’s capital.
The mechanics are the same whether you’re running a sole proprietorship, a partnership, or a corporation. What changes is the equity account on the receiving end.
What Counts as a Temporary Account
Temporary accounts track activity across a reporting period. Permanent accounts (cash, equipment, loans payable, retained earnings) hold a position at a point in time and carry forward indefinitely. If the account measures performance over a span, it’s temporary and it gets closed.
The temporary accounts you’ll be zeroing out fall into these buckets:
- Revenue accounts: sales, service fees, interest income, and any other earnings from the period.
- Expense accounts: wages, rent, utilities, supplies, depreciation, and every other cost of running the business during the period.
- Gains and losses: non-operating items like profit on selling equipment or a loss from settling a lawsuit. They close using the same mechanics as revenue and expenses.
- Dividends or owner draws: money pulled out of the business by owners or shareholders. These reduce equity but are not expenses, so they bypass Income Summary and close directly to the equity account.
- Income Summary: a clearing account that exists only during the closing process. It collects revenue and expense balances, nets them, and hands the result off to equity.
Distributions to owners are worth a second look because they cause confusion. In a corporation, dividends come out of earnings and profits but are not deductible business expenses.1Internal Revenue Service. Paying Yourself In a sole proprietorship or partnership, the equivalent is an owner’s draw or guaranteed payment. Either way, the closing entry skips Income Summary and reduces equity directly.
What to Confirm Before You Close
You cannot close temporary accounts until you have a finalized adjusted trial balance. If adjustments are still pending, the revenue and expense figures you close will be wrong, and the error will follow you into the financial statements and the tax return.
Before writing a single closing entry, confirm:
- All adjusting entries are posted. Accrued wages, unearned revenue reclassifications, depreciation, and any other adjustments are already reflected in account balances.
- The trial balance balances. Total debits equal total credits. If they don’t, find the error before proceeding.
- You know the destination equity account. Corporations close to Retained Earnings. Sole proprietorships close to Owner’s Capital. Partnerships close to each partner’s individual capital account.
- You have the totals. Pull the total credit balances from every revenue account and the total debit balances from every expense account. These are the numbers you’ll use in Steps 1 and 2.
Skipping this preparation is where most closing errors start. An unadjusted balance that slips through will overstate or understate net income, and by the time anyone catches it, the wrong figure may already be on a filed return.
The Four Closing Entries
The same four steps apply regardless of business size or entity type. Each entry removes the balance from a temporary account and pushes it toward its final home in equity.
Step 1: Close Revenue to Income Summary
Revenue accounts normally carry credit balances. To zero them out, debit each revenue account for its full balance and credit Income Summary for the combined total. If the business earned $50,000 in service revenue and $2,000 in interest income during the period, debit Service Revenue for $50,000, debit Interest Revenue for $2,000, and credit Income Summary for $52,000.
Gains from non-operating activities, such as selling equipment at a profit, also carry credit balances and roll into the same Income Summary credit.
Step 2: Close Expenses to Income Summary
Expense accounts normally carry debit balances. To eliminate them, credit each expense account for its full balance and debit Income Summary for the total. If the period’s expenses included $30,000 in wages, $6,000 in rent, and $1,500 in utilities, credit each account for its respective amount and debit Income Summary for $37,500.
Non-operating losses, such as a loss on disposal of assets, carry debit balances and close alongside regular expenses.
Step 3: Close Income Summary to Equity
After Steps 1 and 2, Income Summary holds the net result. A credit balance means net income. A debit balance means a net loss.
For net income, debit Income Summary and credit Retained Earnings (or Owner’s Capital) for the amount. For a net loss, credit Income Summary and debit Retained Earnings. This is the entry that actually changes the equity section of the balance sheet. Using the numbers above, Income Summary carries a $14,500 credit balance ($52,000 minus $37,500), so you’d debit Income Summary for $14,500 and credit Retained Earnings for $14,500.
Step 4: Close Dividends or Draws to Equity
Dividends and owner draws do not pass through Income Summary because they aren’t part of the income calculation. They reduce equity directly. If owners withdrew $5,000 during the period, credit the Dividends (or Drawing) account for $5,000 and debit Retained Earnings (or Owner’s Capital) for $5,000. After this entry, every temporary account in the ledger should read zero.
Confirming the Close Worked
Once all four entries are posted, run a post-closing trial balance. This report should contain only permanent accounts: assets, liabilities, and the updated equity accounts. Revenue, expenses, gains, losses, dividends, draws, and Income Summary should not appear.
If a temporary account still shows a balance, something went wrong. A closing entry was recorded for the wrong amount, posted to the wrong account, or missed entirely. Fixing that error now, before the new period’s transactions start flowing in, is dramatically easier than untangling it weeks later.
The post-closing trial balance also serves as the starting point for the next period. External auditors typically request it as evidence that the closing process was executed correctly and that the opening balances for the new year tie back to the prior year’s ending balances.
Reversing Entries on Day One of the New Period
On the first day of the new period, many accountants post reversing entries to undo certain accruals from the previous period’s adjusting entries. This step is optional, but it prevents a common problem: double-counting expenses.
Say you accrued $3,000 in wages at year-end because employees had worked days that hadn’t been paid yet. That adjusting entry debited Wage Expense and credited Wages Payable. When the actual payroll check goes out in January, the payroll system naturally debits Wage Expense again. Without a reversing entry, the same $3,000 hits expense twice.
A reversing entry on January 1 flips the accrual: debit Wages Payable, credit Wage Expense. When payroll runs normally, the expense lands correctly without anyone needing to split the payment manually. The adjusting entries that benefit most from reversal are accrued expenses and accrued revenues. Depreciation entries and reclassifications of unearned revenue are generally not reversed.
When Software Does It for You
If you use QuickBooks, Xero, or a larger ERP system, closing looks different in practice than the textbook version. Most modern platforms generate the closing entries automatically when you advance to a new period or run the year-end close function. The software debits and credits the same accounts behind the scenes, but you may never see a formal Income Summary entry in the journal.
Some platforms handle closing entries in real time, with retained earnings updating continuously rather than waiting for a manual close. Others require you to designate a closing date. Once that date is set, transactions dated before the cutoff are typically locked, preventing accidental edits to a closed period.
Automation eliminates most of the mechanical risk of posting to the wrong account or entering the wrong amount. Where mistakes still happen is upstream: adjusting entries that were never made, bank reconciliations that weren’t finished, or accrued expenses that nobody recorded. The software will faithfully close whatever balances it finds, correct or not.
Why Getting the Close Right Matters
The closing process produces the net income figure that flows onto the tax return. For calendar-year businesses, the 2026 filing deadlines for 2025 returns are March 16, 2026 for partnerships (Form 1065) and S corporations (Form 1120-S), and April 15, 2026 for C corporations (Form 1120). Each carries an automatic six-month extension. Fiscal-year businesses file by the 15th day of the third month after year-end for S corporations and partnerships, and the 15th day of the fourth month for C corporations.2Internal Revenue Service. Publication 509 Tax Calendars For Use in 2026 Corporate returns also require a Schedule M-1 or M-3 reconciling book income to taxable income, so errors in the closing process cascade into that reconciliation.
Closing errors that produce incorrect returns can trigger the accuracy-related penalty under federal tax law: 20% of any underpayment attributable to negligence or a substantial understatement of income tax. For individuals, a substantial understatement means the error exceeds the greater of 10% of the tax that should have been shown on the return or $5,000. For C corporations, the threshold is the lesser of 10% of the correct tax (or $10,000 if larger) and $10 million.3Office of the Law Revision Counsel. 26 U.S. Code 6662 – Imposition of Accuracy-Related Penalty on Underpayments A sloppy close that misstates net income by a moderate amount can easily cross the $5,000 threshold for individuals or small businesses.
The IRS requires businesses to retain records supporting income, deductions, and credits until the statute of limitations expires. In most cases, that means keeping the general ledger, closing entries, and trial balances for at least three years from the filing date. If gross income was underreported by more than 25%, retention extends to six years. If no return was filed or the return was fraudulent, there is no expiration and records should be kept indefinitely.4Internal Revenue Service. How Long Should I Keep Records Documenting each closing entry is both good accounting practice and your best defense if the IRS ever questions the return.