Closing Entry in Accounting: How to Record & Examples Leave a comment

That’s exactly what we will be answering in this guide –  along with the basics of properly creating closing entries for your small business accounting. These best practices, combined with the right technology and team alignment, can transform your month-end close from a stressful scramble into a smooth, predictable process. The result is not just a faster close, but also a more accurate one that gives your business timely insights for better decision-making. In this guide, we’ll walk through the essential steps, best practices, and practical tools to transform your month-end close into a streamlined, value-adding process. To help you take control and manage your close process seamlessly, this blog provides you with a month-end close checklist, helping you close your books effortlessly each month. Given the frequency of month-end closings, you and your accounting staff would be well served to make this process as easy and efficient as possible.

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The month-end close process is essential for maintaining accurate financial records and providing timely insights for business decisions. By implementing standardization, automation, and continuous improvement practices, finance teams can transform this critical function from a burden into a value-adding process. Account reconciliation traditionally consumes a significant portion of the closing process in accounting. AI and machine learning technologies now automate this tedious task by matching thousands of transactions in seconds.

#2 – Permanent accounts

The reconciliation process is a critical part of the entire month-end closing process, enabling organizations to identify discrepancies and maintain financial integrity. For optimal results, businesses should leverage an automated accounting system that automates transaction matching based on pre-defined algorithms. Closing entries are journal entries required to close all nominal or temporary accounts at the end of a financial or accounting period or year. Suppose a business had the following trial balance before any closing journal entries at the end of an accounting period. Once all the adjusting entries are made the temporary accounts reflect the correct entries for revenue, expenses, and dividends for the accounting year.

Year End in Accounting

By implementing these templates, you ensure that every team member follows the same procedures, maintaining uniform quality of work regardless of who manages the free upgrade to quickbooks online advanced for qbo accountant users task. At the end of each month-end close, take time to evaluate what went well and what didn’t. Getting feedback from your team can also help you understand where the process could be smoother. With clear responsibilities, everyone on the team is accountable, which makes the closing process more organized and consistent.

Step 2: Reconcile Accounts

Think of this as putting the finishing touches on your financial report—making sure every cent is where it’s supposed to be. This is crucial because it clears out last year’s earnings, how to do payroll accounting so you can accurately track how much you earn next year without any confusion from past amounts. Double Entry Bookkeeping is here to provide you with free online information to help you learn and understand bookkeeping and introductory accounting.

These permanent accounts form the foundation of your business’s balance sheet. However, you might wonder, where are the revenue, expense, and dividend accounts? These accounts were reset to zero at the end of the previous year to start afresh. On expanding the view of the opening trial balance snapshot, we can view them as temporary accounts, as can be seen in the snapshot below.

What are Temporary Accounts?

In just a few clicks, the entire financial year closing is streamlined for you. Lastly, if we’re dealing with a company that distributes dividends, we have to transfer these dividends directly to retained earnings. Notice that the balance of the Income Summary account is actually the net income for the period.

Apart from the guidelines, there are strict auditing rules to protect and ensure the integrity of the numbers being reported for any accounting period. Having an intermediate income summary account proves helpful to the accountant here as it provides a trail of accounting closing entries for each financial transaction. Permanent Account entries show the long-standing financial position of a company. All the temporary accounts, including revenue, expense, and dividends, have now been reset to zero. The balances from these temporary accounts have been transferred to the permanent account, retained earnings.

• The process of creating, reviewing, and finalizing financial statements at the end of the month is referred to as the end-of-month reporting.
• Expense accounts have a debit balance, so you’ll have to credit their respective balances and debit income summary in order to close them.
• This allows your finance team to focus on investigating exceptions rather than manually matching routine transactions during the closing month-end cycle.
• This is crucial because it clears out last year’s earnings, so you can accurately track how much you earn next year without any confusion from past amounts.
• After posting closing entries in the general ledger and/or sub-ledgers, the next step is to perform reconciliations for all the accounts in order to ensure their accuracy.
• If you’re looking to simplify this process and reduce the stress that often comes with closing entries, consider using Xenett.

Without a clear, structured process, you risk missing deadlines, skipping important steps, and making costly errors. Maintaining consistency across multiple clients also becomes more challenging, and you may have to guide your team through every stage every single time. Closing entries are an important facet of keeping your business’s books and records in order. By maintaining your bookkeeping, you can ensure that you are constantly kept informed. As well as being consistently up-to-date on the financial health of your business. Any remaining balances will now be transferred and a post-closing trial balance will be reviewed.

These intelligent systems can identify patterns, flag exceptions, and even learn from historical data to continuously improve. SolveXia’s automation platform, for example, can reduce reconciliation time by up to 90% while simultaneously improving accuracy and providing better visibility into discrepancies. This allows your finance team to focus on investigating exceptions rather than manually matching routine transactions during the closing month-end cycle. This process typically includes reconciling bank statements, verifying account balances, reviewing revenue and expenses, and preparing financial statements.

• I.e., moving the balances directly from revenue and expense account to the retained earnings account.
• Closing entries, on the other hand, are entries that close temporary ledger accounts and transfer their balances to permanent accounts.
• With the right digital tools, your month-end close becomes more than a compliance exercise; it becomes an opportunity to deliver timely financial insights that drive business performance.
• However, what poses significant challenges for accounting teams are common errors that further makes the process cumbersome.
• Our program is specifically developed for you to easily set up your closing process and initiate book closing within seconds – no prior technical knowledge necessary.
• Modern technology solutions have transformed month end close processes in accounting from a manual, time-consuming exercise into a streamlined, efficient workflow.

After this closing entry has been posted, each of these revenue accounts has a zero balance, whereas the Income Summary has a credit balance of $7,400. When dividends are declared by corporations, they are usually recorded by debiting Dividends Payable and crediting Retained Earnings. Note that by doing this, it is already deducted from Retained Earnings (a capital account), hence will not require a closing entry.

In addition, if the accounting system uses subledgers, it must close out each subledger for the month prior to closing the general ledger for the entire company. If the subsidiaries also use their own subledgers, then their subledgers must be closed out before the results of the subsidiaries can be transferred to the books of the parent company. The net result of these activities is to move the net profit or net loss for the period into the retained earnings account, which appears in the stockholders’ equity section of the balance sheet. We at Deskera offer the best accounting software for small businesses today. Our program is specifically developed for you to easily set up your closing process and initiate book closing within seconds – no prior technical knowledge necessary. To close expenses, we simply credit the expense accounts and debit Income Summary.

It ensures that tasks are completed consistently and reduces the risk of missed steps, especially when onboarding new team members or delegating work. Month-end close is always time-sensitive, and while you’re managing multiple clients’ needs, the pressure increases. There’s a limited window to review transactions, reconcile accounts, and finalize reports. If there are delays—whether from missing records, last-minute adjustments, or slow internal processes—you’re left rushing to meet deadlines.

This step is essential because it shows the growth of your company’s equity through retained profits. Say you’re running a freelance design business and have earned $50,000 in revenue this year. By the end of the year, you’ve made $100,000 in revenue and incurred $60,000 in expenses.

Further, you can eliminate unnecessary process delays billing period date on subscription invoices caused by waiting for staff to begin the next step in the chain. When the work is done the same way through consolidated workflows, regardless of who is doing it or when it’s done, you can create more consistent, reliable processes and records. Look into standardizing your documentation and financial data across systems. The month-end close process is a complex, detail-heavy task where even small oversights can lead to significant issues.