Accounting & bookkeeping
Closing Entries in Accounting: Reset Temporary Balances
Closing entries transfer temporary account balances so a new reporting period can start with those accounts at zero. They do not erase permanent asset, liability or equity balances. This original example uses a simplified corporation-style teaching model with retained earnings and an Income Summary account.
Read the adjusted balances
OpenStax distinguishes temporary accounts from permanent balances and demonstrates an Income Summary approach. Here all adjustments are already complete, and the supplied model has no tax or additional accounts. It is not a rule for every entity type or software system.
Original adjusted trial balance
Debits: Cash 6,000; Equipment 2,000; Expenses 1,800; Dividends 200. Total 10,000.
Credits: Accounts payable 1,000; Common stock 4,000; opening Retained earnings 2,000; Revenue 3,000. Total 10,000.
Prepare the four closing steps
Close the stated temporary balances using the model’s intermediary account. Amounts are whole teaching currency units.
Original closing answer key
1. Debit Revenue 3,000; credit Income Summary 3,000.
2. Debit Income Summary 1,800; credit Expenses 1,800.
3. Income Summary now has a credit balance of 1,200. Debit Income Summary 1,200; credit Retained earnings 1,200.
4. Debit Retained earnings 200; credit Dividends 200.
After posting: Revenue, Expenses, Dividends and Income Summary each have zero balance.
Reconcile the permanent balances
Retained earnings becomes 2,000 + 1,200 − 200 = 3,000. Cash remains 6,000 and equipment 2,000; neither is paid or moved by these closing entries. The post-closing debit total is therefore 8,000.
Post-closing credits are Accounts payable 1,000 + Common stock 4,000 + Retained earnings 3,000 = 8,000. The pre-close 10,000 and post-close 8,000 are different because temporary debit and credit balances have been transferred, not because 2,000 of cash disappeared.
Explain why closing is not deletion
A complete explanation names the transfer and retains the period’s history.
Original practice answer
“I closed revenue and expenses through Income Summary, transferred the resulting 1,200 to retained earnings and closed the 200 dividends balance. Retained earnings ends at 3,000. Permanent assets remain, and the completed period’s records remain available.”
Avoid resetting permanent accounts
Do not zero cash, equipment or the supplier balance merely because the period ended. Do not re-record the actual dividend payment during this closing step; its balance is already in the supplied adjusted trial balance.
For a variation, assume expenses were 3,200 rather than 1,800 and revise the complete adjusted balances consistently before closing. That would create a loss rather than a positive income transfer. Never change one opening number while pretending the rest of a supplied trial balance still balances.
Questions, answered
Do closing entries move cash?
Not in these supplied entries. They transfer temporary balances; cash remains 6,000.
Are all accounts reset to zero?
No. The permanent asset, liability and equity balances remain after closing.
Sources and examples
ResumizeAI team. Examples are fictional teaching material, not customer results. Replace sample details with your own facts.
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