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Lesson details
- Estimated study time
- 25 min
- Reading context
- Chapter 3
Closing walkthroughUse this lesson when you need to decide which accounts reset, prepare closing entries, or build a post-closing trial balance.
Learning objectives (8)
A closing entry brings a temporary account to zero and transfers its effect to equity. Use this walkthrough when you need to decide which accounts close, choose the debit or credit, or check the next period's opening balances.
Distinguish the accounts before preparing entries
Revenue, expense, and dividend accounts measure activity for one period. These temporary accounts reset so the next period measures its own activity. Assets, liabilities, and permanent equity accounts carry their balances forward.
Depreciation Expense closes, but Accumulated Depreciation does not. The first measures the current period's allocation of equipment cost. The second records cost allocated across periods and reduces the equipment amount on the balance sheet. Retained Earnings is permanent even though closing changes its balance.
Use the complete adjusted balances
Maple Studio is a standalone design-services corporation. Its year runs from January 1 through December 31, 2026. Beginning Retained Earnings is $8,000, Common Stock is $20,000, and no shares were issued or retired. Dividends are $2,000. There are no income taxes or other equity changes in this example.
Prepare direct closing entries, then a post-closing trial balance. Use all the adjusted balances below; the Retained Earnings line does not yet include the current year's closing transfers.
| Maple Studio | Amount | Amount |
|---|---|---|
| Adjusted Trial Balance | ||
| December 31, 2026 · US Dollars | Debit | Credit |
| Cash | $19,400 | |
| Accounts Receivable | 9,600 | |
| Equipment | 30,000 | |
| Accumulated Depreciation | $6,000 | |
| Accounts Payable | 7,500 | |
| Wages Payable | 1,500 | |
| Common Stock | 20,000 | |
| Retained Earnings | 8,000 | |
| Service Revenue | 46,000 | |
| Wages Expense | 18,000 | |
| Rent Expense | 6,000 | |
| Depreciation Expense | 4,000 | |
| Dividends | 2,000 | |
| Total | $89,000 | $89,000 |
Calculate the expected ending balance
Expenses total $18,000 + $6,000 + $4,000 = $28,000. Revenue of $46,000 less those expenses gives $18,000 of net income. Ending retained earnings should therefore be $8,000 + $18,000 - $2,000 = $24,000.
The dividend reduces retained earnings without reducing net income. This distinction matters even when an incorrect calculation happens to give the correct ending equity.
Record the entries
Debit Service Revenue to remove its credit balance. Credit Retained Earnings to transfer the revenue's effect on equity:
Credit each expense for its debit balance. The matching debit to Retained Earnings is the $28,000 total:
Close Dividends separately because it is not part of net income:
Each temporary account now has equal debits and credits. Retained Earnings has a $24,000 credit balance: $8,000 + $46,000 - $28,000 - $2,000. The entries do not move Cash or delete the earlier transactions.
List the balances that carry forward
The post-closing trial balance includes the permanent accounts. Accumulated Depreciation remains because it records cost allocated to expense across periods, not just this year's depreciation.
| Maple Studio | Debit | Credit |
|---|---|---|
| Post-closing trial balance, December 31, 2026, US dollars | ||
| Cash | $19,400 | |
| Accounts Receivable | 9,600 | |
| Equipment | 30,000 | |
| Accumulated Depreciation | $6,000 | |
| Accounts Payable | 7,500 | |
| Wages Payable | 1,500 | |
| Common Stock | 20,000 | |
| Retained Earnings | 24,000 | |
| Total | $59,000 | $59,000 |
Check the account list as well as the totals. An omitted expense closing line and its matching equity debit can leave equal column totals while retaining a temporary balance. Comparing Retained Earnings with the independent calculation provides another check on the close.
The history is still there
Closing adds entries instead of deleting the original transactions. A zero Service Revenue balance after closing does not mean that the company earned no revenue. It means the revenue credits and closing debit offset in that account.
When examining the ledger, separate customer transactions from closing transfers. Otherwise, summing all credits and debits could make the year's revenue appear to be zero. The records should still identify the dates, accounts, and purpose of each entry.
If another textbook uses Income Summary
Income Summary is an intermediate temporary account. Revenue and expenses close to it, and its net balance then closes to Retained Earnings. Dividends still close directly to Retained Earnings. Both methods must leave the same ending equity and zero temporary balances.
Check your understanding
Without repeating the entries, explain why Accumulated Depreciation carries forward while Depreciation Expense closes. Then explain why closing Dividends does not reduce the net income shown on the income statement.
Check the explanation
Accumulated Depreciation records allocations from earlier periods as well as the current one. Depreciation Expense measures only the current period's allocation. Dividends are distributions to shareholders, not costs of earning revenue, so they reduce retained earnings separately from net income.