Closing entries practice: closing the books step by step

At the end of the year, revenue, expense and drawing accounts start over at zero. Closing entries are the journal entries that do this. They move each temporary balance into Income Summary and then into Owner's Capital, so the new year starts clean and capital shows what the owner really has in the business.

What closing entries are for

Some accounts measure a period. Service Revenue tells you how much the business earned this year. Rent Expense tells you how much rent it used up this year. Owner's Drawing tells you how much the owner took out this year. Once the year is over, those totals have done their job. Next year needs its own totals, starting from zero.

These are called temporary (or nominal) accounts. Everything else on the balance sheet is a permanent (or real) account: Cash, Accounts Receivable, Equipment, Accounts Payable and Owner's Capital carry their balances forward from one year into the next. Closing entries touch only the temporary accounts and Owner's Capital. They never touch Cash or any other asset or liability.

There is a second reason to close. During the year, the profit the business earns sits in the revenue and expense accounts, not in capital. Owner's Capital on the adjusted trial balance still shows the opening balance plus any new investments. Closing is the step that moves the year's net income (or net loss) and the year's drawing into capital, so the balance sheet ties to the statement of owner's equity.

The four closing entries

Most courses close the books in four entries, in this order:

1. Close the revenue accounts to Income Summary. Revenue accounts have credit balances, so you debit each one for its balance and credit Income Summary for the total.
2. Close the expense accounts to Income Summary. Expense accounts have debit balances, so you credit each one for its balance and debit Income Summary for the total.
3. Close Income Summary to Owner's Capital. After the first two entries, Income Summary holds the net income. A credit balance is net income; a debit balance is a net loss. You debit (or credit) Income Summary to bring it to zero and put the same amount into capital.
4. Close Owner's Drawing to Owner's Capital. Drawing has a debit balance, so you credit it and debit capital.

Entries 3 and 4 are often combined into one compound entry: debit Income Summary, credit Owner's Drawing, and credit Owner's Capital for the difference. The third exercise in this lesson asks for exactly that compound entry.

Income Summary is a clearing account. It exists only during closing. It starts at zero, collects revenues on one side and expenses on the other, and is back to zero when closing is finished. Its job is to show net income as a single number before it goes into capital.

Worked example: Copperleaf Studio

Here is Copperleaf Studio's adjusted trial balance at December 31, 2025. It is the trial balance from the free exercise in this lesson. "Adjusted" means the adjusting entries for the year have already been posted, so every balance is final.

The first job is sorting. The temporary accounts are the two revenues, the three expenses and Owner's Drawing. Everything above Owner's Drawing in the list, apart from capital itself, is permanent and stays as it is.

Step 1: close the revenues

Service Revenue has a $52,700 credit balance and Interest Revenue has a $627 credit balance. Debit each one for its balance. The total, $53,327, is credited to Income Summary. This is the entry the free exercise asks for.

Step 2: close the expenses

The three expenses total $6,060 + $12,120 + $8,484 = $26,664. Credit each expense for its balance and debit Income Summary for the total.

Notice that Owner's Drawing is not in this entry, even though it also has a debit balance. Drawing is not an expense. It is money the owner took out, not a cost of earning revenue, so it does not belong in net income.

Step 3: close Income Summary

Income Summary now has $53,327 on the credit side and $26,664 on the debit side. The difference is a $26,663 credit balance, which is Copperleaf Studio's net income for 2025. Debit Income Summary for $26,663 to bring it to zero, and credit Owner's Capital for the same amount.

Step 4: close Owner's Drawing

Owner's Drawing has a $12,500 debit balance. Credit it for $12,500 and debit Owner's Capital. In practice, steps 3 and 4 are usually recorded together as one compound entry:

Capital takes the difference: $26,663 of net income less $12,500 of drawing is a $14,163 increase. Owner's Capital goes from $41,700 to $55,863. That ending figure is the same number the statement of owner's equity reports: opening capital, plus net income, less drawing.

Checking the result

After all four entries are posted, every revenue, expense and drawing account reads zero, and so does Income Summary. The only accounts left with balances are the permanent ones. A post-closing trial balance lists them to prove the ledger still balances. For Copperleaf Studio, the debits are Cash, Accounts Receivable, Supplies and Equipment; the credits are Accumulated Depreciation, Accounts Payable and the new $55,863 of Owner's Capital. If a temporary account still shows up on the post-closing trial balance, something was missed.

Two more examples from the exercises

The second exercise uses Pine Street Dental. Its expenses are Wages Expense of $17,837, Rent Expense of $7,928 and Insurance Expense of $11,891, so the expense closing entry debits Income Summary for $37,656 and credits each expense for its balance. Its trial balance also shows a $4,500 debit balance in Owner's Drawing, placed there to tempt you. It stays out of this entry.

The third exercise gives a different Copperleaf Studio trial balance where revenues and expenses are already closed and Income Summary holds a $28,915 credit balance (net income). Owner's Drawing is $12,100. The compound entry debits Income Summary $28,915, credits Owner's Drawing $12,100 and credits Owner's Capital $16,815.

Common mistakes with closing entries

These are the mistakes the exercises check for. Each one produces an entry that still balances, which is why it is easy to miss.

Closing revenues or expenses straight to capital

It is tempting to skip Income Summary and debit Service Revenue and Interest Revenue with a $53,327 credit to Owner's Capital. The final capital balance can even come out the same. But the method this lesson follows routes revenues and expenses through Income Summary first, so that net income appears as one figure before it reaches capital. The same applies to expenses: close them to Income Summary, not to Owner's Capital.

Putting every line on the opposite side

If you credit the revenues and debit Income Summary, you have doubled the revenue balances instead of clearing them. Service Revenue would show $105,400 instead of zero. Revenue accounts carry credit balances, so they are closed with debits. In the compound entry, the same reversal shows up as crediting Income Summary and debiting drawing. Income Summary's net income balance is a credit, so you debit it; drawing's balance is a debit, so you credit it.

Closing Owner's Drawing with the expenses

Because drawing has a debit balance like an expense, some learners add it to the expense closing entry. For Pine Street Dental, that would make the Income Summary debit $42,156 instead of $37,656, and net income would look $4,500 smaller than it is. Drawing is a distribution to the owner, not an expense, so it never goes through Income Summary. It is closed directly to Owner's Capital.

Leaving Owner's Drawing open

The opposite error is to close Income Summary and forget drawing. In the third exercise, that would mean crediting Owner's Capital for the full $28,915 of net income. Drawing would then carry its $12,100 balance into the new year, and capital would be overstated by the same $12,100. Credit drawing for its balance and credit capital only for what is left.

How closing fits the accounting cycle

Closing comes near the end of the cycle. You record transactions during the year (see journal entry practice problems), prepare a trial balance (trial balance practice), post the adjusting entries (adjusting entries practice), prepare the financial statements from the adjusted trial balance, and only then close. The order matters. If you closed before preparing the income statement, the revenue and expense accounts would already be zero.

Once the statements are done, the closing entries are mechanical. That makes them a good topic to drill. Each exercise in this lesson gives you a new trial balance, and the free one below gives you new numbers each time you open it.