Closing Entry

A closing entry moves the balances of income and expense accounts into retained earnings at the end of the financial year, resetting them to zero so the next year starts clean. Most modern accounting software does it automatically, which is why the term causes more confusion than the mechanic deserves.

What It Does

Income and expense accounts are temporary — they measure a period. Balance sheet accounts are permanent — they carry forward. Closing entries are what enforce that distinction.

At year end, the net of all income and expense accounts is transferred into retained earnings, which is part of equity. The profit and loss accounts then start the new year at zero, while the balance sheet continues uninterrupted.

In QuickBooks Online and Xero this happens implicitly rather than through a visible journal: the software calculates the carry-forward based on your financial year end. You will not usually see a closing entry in the ledger, which is why people are surprised when they go looking.

What You Do Need to Do

Because the software handles the mechanic, the real year-end work is different: locking the period so nobody posts into a closed year, and making sure the adjusting entries were made before the close.

Setting a closing date with a password in QuickBooks Online, or locking the period in Xero, is the step most often skipped. Without it, a transaction dated into a finalised year will quietly change figures that have already been reported — filed with a lender, used in a return, shown to a buyer.

That is the version of this that actually causes problems: not a missing closing entry, but a year that was never locked.

What Goes Wrong

The period is never locked. Prior-year figures change after the fact, and nobody notices until two versions of the same year exist.

Adjustments are made after the close. Ordering matters; adjust first, then close.

Manual closing entries posted on top of automatic ones. This double-counts the carry-forward and produces an equity section nobody can reconcile. If your software closes automatically, do not also journal it.

Retained earnings never checked. It should move by exactly the year’s profit, less any distributions. When it does not, something was posted directly to equity.

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