Accounting: Basics of the Closing Process

Start Quiz

At the end of each accounting period, accounts must bring their books up to date, in what is known as closing. Closing is the process of bringing all revenue, expense and dividend accounts to zero at the end of the accounting period.

The closing process reinforces the time period concept, in that it helps divide the life of a business into distinct units. Once all of these accounts have been used to adjust the Retained Earnings, the financial status of the business can be assessed more easily and accurately.

Only temporary accounts (essentially, those that appear on the income statement) are closed. The following accounts are temporary: revenues, expenses, income summary and dividends. The Dividends account is the last to be closed at the end of the accounting period. During the closing process, the balances of all these accounts are ultimately transferred to the Retained Earnings account.

After closing is complete, the accountant can make a post-closing trial balance. The post-closing trial balance is the list of accounts and their balances at the end of the accounting period, after closing entries have been completed.