How to Journalize Closing Entry: A Complete Guide for Accountants
Contents
At the end of every accounting period, whether monthly, quarterly, or annually, businesses need to reset their temporary accounts. This ensures that revenues and expenses don’t carry over into the next period, keeping financial records accurate and ready for fresh reporting. This process is known as making closing entries, and the act of recording them is called journalizing closing entries.
If you've ever wondered how to cleanly wrap up your books at the end of a period, this guide is for you. In this article, we’ll explain what it means to journalize closing entry, how it affects your accounts, and how to do it step by step. We’ll also cover common mistakes, best practices, and include a section about how Qbox, an all-in-one collaboration platform for accountants, can make your closing process smoother.
What Does It Mean to Journalize Closing Entries?
Journalizing closing entry means creating formal journal entries in your accounting system to transfer balances from temporary accounts to permanent accounts. These entries are typically made at the end of an accounting period to reset income, expenses, and dividends (or withdrawals) to zero in preparation for the next cycle.
You’re essentially closing the books for that period—hence the term “closing entry.”
Temporary vs. Permanent Accounts
To understand closing entries, it’s important to differentiate between temporary and permanent accounts.
-
Temporary accounts
Include revenue, expenses, and dividends or drawing accounts. These accumulate data during a period and reset to zero afterward. -
Permanent accounts
Include assets, liabilities, and equity. These carry forward from one accounting period to the next.
The closing process ensures that temporary account balances don’t incorrectly roll over into the new period.
Why Are Closing Journal Entries Important?
Making closing journal entry entries is essential for several reasons:
- Accuracy: Prevents double-counting revenue or expenses in multiple periods.
- Clean Reports: Ensures income statements reflect only current-period results.
- Retained Earnings Update: Transfers net income or loss into retained earnings on the balance sheet.
- Audit Readiness: Keeps your books in line with Generally Accepted Accounting Principles (GAAP).
Whether you're working in-house or as a public accountant, knowing how to journalize closing entry transactions is foundational to maintaining proper records.
Types of Closing Entries (With Examples)
There are typically four types of closing entries:
1. Close Revenue Accounts
Transfer all credit balances from revenue accounts to an income summary.
Example Entry:
Debit: Service Revenue $20,000
Credit: Income Summary $20,000
2. Close Expense Accounts
Transfer all debit balances from expense accounts to the income summary.
Example Entry:
Debit: Income Summary $12,000
Credit: Rent Expense $5,000
Credit: Wages Expense $4,000
Credit: Utilities Expense $3,000
3. Close Income Summary to Retained Earnings
This moves net income (or net loss) to the retained earnings account.
If there’s net income:
Debit: Income Summary $8,000
Credit: Retained Earnings $8,000
If there’s net loss, reverse the accounts.
4. Close Withdrawals/Dividends
If you're working with a sole proprietorship or corporation, you'll close out the owner’s drawing or dividend account.
Example Entry:
Debit: Retained Earnings $2,000
Credit: Owner’s Drawing $2,000
Step-by-Step: How to Journalize Closing Entry
Let’s go through the process of how to journalize closing entry transactions step by step:
Step 1: Transfer Revenues to Income Summary
Combine all revenue accounts into one entry.
Step 2: Transfer Expenses to Income Summary
Combine all expense accounts and credit them.
Step 3: Close the Income Summary to Retained Earnings
Subtract expenses from revenues to determine net income (or net loss) and update equity.
Step 4: Close Owner Withdrawals or Dividends
Reduce retained earnings by the amount of drawings or dividends.
Repeat this every accounting period to keep your ledger clean.
Common Mistakes When Making Closing Entries
Even experienced accountants sometimes make these errors:
1. Forgetting to Close All Temporary Accounts
Any leftover balance skews next period’s reporting.
2. Using the Wrong Accounts
Make sure you're transferring to and from the correct ledgers—especially income summary and retained earnings.
3. Not Double-Checking Balances
Always ensure that debits equal credits for each journal entry.
4. Failing to Save Work Properly
If you're using software without autosave or version control, a mistake could undo hours of work.
This is where tools like Qbox come into play.
Qbox: All-in-One Accounting Collaboration Software
Closing entries often require coordination between accountants, bookkeepers, and clients—especially when working remotely. This is where Qbox becomes an essential tool.
Qbox is a secure file-sharing and collaboration software built specifically for accounting professionals who work with QuickBooks Desktop and other file-based systems.
Key Features for Journalizing Closing Entries:
- Real-Time Collaboration: Share and work on closing entries with clients or team members securely.
- Auto-Locking System: Prevents simultaneous edits on the same file, ensuring accuracy.
- File Syncing: Automatically updates accounting files across users.
- Version History: Roll back to previous versions if an error is made during journal entries.
- Secure Client Access: Clients can upload closing period documents directly.
Whether you're closing books monthly or annually, Qbox ensures your files are safe, current, and accessible to your entire team.
Top 5 FAQs About Journalizing Closing Entries
1. What are the 4 closing entries in accounting?
The four entries are: (1) closing revenue to income summary, (2) closing expenses to income summary, (3) transferring net income/loss to retained earnings, and (4) closing drawings or dividends.
2. Is the income summary account permanent?
No. The income summary account is a temporary account used only during the closing process and is closed to retained earnings afterward.
3. What happens if I don’t make closing entries?
Not closing entries results in incorrect net income on the next period's reports, and may carry over incorrect balances in temporary accounts.
4. What type of account is income summary?
Income summary is a temporary clearing account used to transfer balances from revenues and expenses before transferring the net to retained earnings.
5. Can I automate closing entries in accounting software?
Yes. Most accounting software allows you to automate or schedule closing journal entries, especially when integrated with tools like Qbox for syncing files across teams.
Final Thoughts
Understanding how to journalize closing entry transactions is crucial for every bookkeeper and accountant. It ensures your financial statements reflect the correct results for each period and prepares your books for the new cycle.
While the process can seem routine, it demands attention to detail and accuracy. Fortunately, by using the correct method—and tools like Qbox for collaboration—you can simplify your closing process, avoid errors, and focus on higher-level financial tasks.
Start making your closing entries more efficient and collaborative with Qbox. Sign Up today.