Closing Entries: Reset the Scoreboard, Keep the Story
Closing entries make more sense when you stop thinking of them as a mechanical final step and start thinking about what each account is actually measuring.
Revenues, expenses, and dividends measure what happened during the current accounting period.
At the end of the period, those accounts reset to zero so the next period starts with a clean scoreboard.
Permanent accounts do not reset. They carry the company's financial story forward.
Meet Harbor Consulting
Expenses = $52,000
Dividends = $6,000
Beginning Retained Earnings = $20,000
Step 1: Find the Period's Result
Reveal net income
Revenues − Expenses = Net Income
$80,000 − $52,000 = $28,000 net income
That $28,000 increases Retained Earnings because it represents profit earned during the period.
Step 2: Account for Dividends
Reveal ending Retained Earnings
Beginning Retained Earnings
+ Net Income
− Dividends
$20,000 + $28,000 − $6,000 = $42,000 ending Retained Earnings
Remember: Dividends are not expenses. They reduce Retained Earnings separately.
Step 3: Which Accounts Reset?
Temporary Accounts
These measure activity for one accounting period:
Revenues
Expenses
Dividends
They close to zero.
Permanent Accounts
These describe the company's continuing financial position:
Assets
Liabilities
Common Stock
Retained Earnings
Their balances carry forward.
What Does Closing Actually Do?
$80,000
$52,000
$28,000
Increases
$6,000
Decreases
$42,000
Before Closing vs. After Closing
Reveal the comparison
| Account | Before Closing | After Closing |
|---|---|---|
| Revenue | $80,000 | $0 |
| Expenses | $52,000 | $0 |
| Dividends | $6,000 | $0 |
| Retained Earnings | $20,000 beginning | $42,000 ending |
| Cash | Ending balance | Same ending balance |
| Accounts Payable | Ending balance | Same ending balance |
Closing does not erase assets or liabilities. It resets the temporary accounts only.
The Scoreboard Analogy
Revenue, expenses, and dividends track the period.
The period's effects move into Retained Earnings.
Temporary accounts begin again at zero.
Permanent balances carry forward.
What Closing Entries Are NOT
Closing entries erase the company's financial history.
No.
Permanent accounts carry forward. Retained Earnings preserves the cumulative effect of prior profits and dividends.
Cash is closed to zero at the end of the period.
No.
Cash is a permanent asset account. Its ending balance becomes the beginning balance for the next period.
Dividends are closed because they are expenses.
No.
Dividends are temporary accounts, but they are not expenses. They reduce Retained Earnings separately from Net Income.
Retained Earnings should be zero after closing.
No.
Retained Earnings is a permanent account. Its ending balance carries into the next period.
If an account appears on the Income Statement or is Dividends, ask whether it belongs only to the current period.
If it does, it should generally be reset before the next period begins.
Can You Reset the Scoreboard?
Expenses = $68,000
Dividends = $5,000
Beginning Retained Earnings = $14,000
1. Net Income
2. Ending Retained Earnings
3. Which accounts will be zero after closing?
4. Which balances carry forward?
Reveal the completed solution
Step 1: Net Income
$95,000 − $68,000 = $27,000
Step 2: Ending Retained Earnings
$14,000 + $27,000 − $5,000 = $36,000
After closing:
Revenue = $0
Expenses = $0
Dividends = $0
Retained Earnings carries forward at $36,000.
Asset, liability, Common Stock, and other permanent account balances also carry forward.