Closing entries and the post-closing trial balance

Temporary accounts — income, expenses and dividends — measure one period. Permanent accounts — assets, liabilities and equity — carry forward. At the end of the period, after the statements have been prepared from the adjusted trial balance, the temporary accounts are emptied so the next period starts measuring from zero.

The closing entry transfers each temporary balance to retained earnings and leaves the temporary accounts at zero: - debit each income account by its balance, - credit each expense and dividend account by its balance, - put the difference in retained earnings: a credit if there's a profit after dividends, a debit if there's a loss (or dividends exceed profit).

Closing doesn't change profit, total equity or any asset or liability — it moves this period's profit from the income-statement accounts into retained earnings, where it belongs on the statement of financial position. That's why retained earnings in the adjusted trial balance is still the opening figure, and why closing retained earnings = opening + profit − dividends.

Some systems first close to an income summary account (revenue and expenses into the summary, whose balance is then the profit), and then close the summary and dividends to retained earnings. The result is the same; the income summary just makes the profit figure visible in the ledger.

The post-closing trial balance lists only permanent accounts. It proves the ledger still balances after closing and that every temporary account is zero, ready for the new period. Retained earnings on it should agree with the statement of financial position.

Common mistakes. Closing Dividends payable (a liability) instead of Dividends declared. Closing Unearned revenue because of its name. Forgetting the dividends. Posting a late adjustment after the closing entry, which leaves an expense balance open in a closed period — the fix is to close that balance too.