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.
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.”
To understand closing entries, it’s important to differentiate between temporary and permanent accounts.
The closing process ensures that temporary account balances don’t incorrectly roll over into the new period.
Making closing journal entry entries is essential for several reasons:
Whether you're working in-house or as a public accountant, knowing how to journalize closing entry transactions is foundational to maintaining proper records.
There are typically four types of closing entries:
Transfer all credit balances from revenue accounts to an income summary.
Example Entry:
Debit: Service Revenue $20,000
Credit: Income Summary $20,000
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
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.
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
Let’s go through the process of how to journalize closing entry transactions step by step:
Combine all revenue accounts into one entry.
Combine all expense accounts and credit them.
Subtract expenses from revenues to determine net income (or net loss) and update equity.
Reduce retained earnings by the amount of drawings or dividends.
Repeat this every accounting period to keep your ledger clean.
Even experienced accountants sometimes make these errors:
Any leftover balance skews next period’s reporting.
Make sure you're transferring to and from the correct ledgers—especially income summary and retained earnings.
Always ensure that debits equal credits for each journal entry.
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.
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.
Whether you're closing books monthly or annually, Qbox ensures your files are safe, current, and accessible to your entire team.
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.
No. The income summary account is a temporary account used only during the closing process and is closed to retained earnings afterward.
Not closing entries results in incorrect net income on the next period's reports, and may carry over incorrect balances in temporary accounts.
Income summary is a temporary clearing account used to transfer balances from revenues and expenses before transferring the net to retained earnings.
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.
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.