Closing the Books: Closing Entries and the Post-Closing Trial Balance, Step by Step
The accounting cycle doesn't stop at your financial statements. This is the last step — zeroing out the temporary accounts so next period starts clean — explained without the textbook density.
By Antoine Joseph · Bookkeeping Basics · 7 min read
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Once your financial statements are done, there's one more step before the next period can start: closing the books. It sounds bigger than it is. Closing entries just reset a handful of accounts to zero so this period's revenue and expenses don't get mixed in with next period's.
Temporary vs. permanent accounts
Temporary accounts track activity for one period only — revenue, expenses, and owner draws (or dividends). They get reset to zero at the end of every period so each period can be measured on its own. Permanent accounts — assets, liabilities, and equity — carry their balance forward. A bank account balance doesn’t reset to zero every month; it just keeps going. That difference is the whole reason closing entries exist.
The four closing entries, step by step
Closing entries route everything through one temporary holding account called Income Summary, then into equity. Here’s the order, with a simple example: $50,000 in revenue, $40,000 in expenses, $5,000 in owner draws.
- 1Close revenue to Income Summary. Debit Revenue $50,000, credit Income Summary $50,000. Revenue is now zero, ready for next period.
- 2Close expenses to Income Summary. Debit Income Summary $40,000, credit each expense account for its balance. Expenses are now zero too.
- 3Close Income Summary to equity. Income Summary now holds $10,000 (the $50,000 revenue minus $40,000 expenses — your net income for the period). Debit Income Summary $10,000, credit Retained Earnings (or Owner’s Capital) $10,000.
- 4Close draws or dividends to equity. Debit Retained Earnings (or Owner’s Capital) $5,000, credit Draws $5,000. Draws aren’t an expense, so they don’t go through Income Summary — they reduce equity directly.
Sole proprietor or partnership?
You likely don’t have a “Retained Earnings” account — that term is for corporations. The same four steps apply, but step 3 and 4 close into Owner’s Capital instead. Same mechanic, different account name.
What a post-closing trial balance proves
Run a trial balance again after posting the closing entries, and you get a post-closing trial balance. Only permanent accounts should appear on it — assets, liabilities, and equity. Every revenue, expense, and draw account should show a zero balance. If one of them doesn’t, a closing entry was missed or posted to the wrong account. This is the final check that the ledger is actually ready for the next period, not just that the paperwork is done.
Where this fits in the accounting cycle
This is step 8 of the accounting cycle’s 9 steps: identify and record each transaction, post it to the ledger, run a trial balance, make adjusting entries, run an adjusted trial balance, prepare financial statements, close the books, then run the post-closing trial balance. See the full accounting cycle for how all nine steps fit together. Skip this step and next period’s revenue starts mixed in with what you already reported — which makes every report after that one wrong in a small, compounding way.
Common mistakes
- Forgetting to close draws or dividends — equity ends up overstated
- Closing an expense account to the wrong side (crediting instead of debiting)
- Confusing closing entries with adjusting entries — adjusting entries happen before financial statements are prepared; closing entries happen after
- Not running a post-closing trial balance at all, and assuming the closing entries posted correctly
Sources
- OpenStax, Principles of Accounting, Volume 1: Financial Accounting — Completing the Accounting Cycle — free, peer-reviewed textbook covering closing entries and the post-closing trial balance
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