9.2 Closing Entries & Post-Closing Trial Balance
Key Takeaways
- Closing entries zero temporary accounts (revenues, expenses, Income Summary, drawings) so the next period starts clean
- Close income accounts to Income Summary, close expense accounts to Income Summary, then close Income Summary to capital or retained earnings
- Close drawings (or dividends) directly to capital or retained earnings; drawings are not closed into Income Summary
- The post-closing trial balance is a trial-balance type containing only permanent (real) accounts after closing
- After closing, revenue and expense ledgers show zero balances; assets, liabilities, and equity carry forward
Where Closing Fits in the Accounting Cycle
Financial reports under HCS412304 Element 1 are drafted from adjusted balances. Once the income statement, equity statement, balance sheet, and (when required) cash-flow statement are done, the books still hold temporary account balances. If you leave Sales, expenses, and drawings open, next period’s ledgers would mix two years of activity.
Closing entries transfer temporary results into equity and reset temporary accounts to zero. The post-closing trial balance then proves that only permanent accounts remain and that debits still equal credits—another trial-balance (TB) type in the HCS412303 / cycle toolbox, taken after closing rather than before statements.
Cycle order reminder: Journalize → Post → Unadjusted TB → Adjusting entries → Adjusted TB / Worksheet → Financial statements → Closing entries → Post-closing TB → (optional reversing entries next period).
Temporary vs Permanent Accounts
| Category | Examples | Closed? |
|---|---|---|
| Temporary (nominal) | Service Revenue, Sales, Sales Returns, COGS, Salaries Expense, Rent Expense, Income Summary, Drawings, Dividends | Yes |
| Permanent (real) | Cash, AR, Inventory, PPE, Accumulated Depreciation, AP, Loans Payable, Capital, Share Capital, Retained Earnings | No — balances carry forward |
Income Summary is a clearing account used only during closing. It should end at zero after the net income or net loss is transferred to equity.
Standard Closing Sequence (Sole Proprietorship)
Perform four journal entries in order:
Step 1 — Close credit-balance income accounts to Income Summary
Debit each revenue / other income account for its balance; credit Income Summary for the total.
Step 2 — Close debit-balance expense and contra-revenue accounts to Income Summary
Credit each expense, COGS, and contra-revenue account for its balance; debit Income Summary for the total.
Step 3 — Close Income Summary to Capital
- If Income Summary has a credit balance (net income): debit Income Summary, credit Owner’s Capital.
- If Income Summary has a debit balance (net loss): debit Owner’s Capital, credit Income Summary.
Step 4 — Close Drawings to Capital
Debit Owner’s Capital; credit Drawings for the drawings balance.
Corporation variant: Close Income Summary to Retained Earnings (not Share Capital). Close Dividends (or Dividends Declared) to Retained Earnings. Do not close revenues into Share Capital.
Partnership variant: Close Income Summary to each partner’s Capital according to the P&L sharing ratio; close each partner’s Drawings to that partner’s Capital.
PHP Worked Example — Closing Luzon Services
Luzon Services (sole prop), after adjustments for the year ended December 31, 2026:
| Account | Balance |
|---|---|
| Service Revenue | ₱280,000 Cr |
| Interest Income | 4,000 Cr |
| Salaries Expense | 120,000 Dr |
| Rent Expense | 48,000 Dr |
| Utilities Expense | 18,000 Dr |
| Supplies Expense | 9,000 Dr |
| Depreciation Expense | 15,000 Dr |
| Luzon, Capital (before closing) | 200,000 Cr |
| Luzon, Drawings | 30,000 Dr |
Net income check: revenues ₱284,000 − expenses ₱210,000 = ₱74,000.
Closing entry (1) — close income
| Account | Debit | Credit |
|---|---|---|
| Service Revenue | 280,000 | |
| Interest Income | 4,000 | |
| Income Summary | 284,000 |
Closing entry (2) — close expenses
| Account | Debit | Credit |
|---|---|---|
| Income Summary | 210,000 | |
| Salaries Expense | 120,000 | |
| Rent Expense | 48,000 | |
| Utilities Expense | 18,000 | |
| Supplies Expense | 9,000 | |
| Depreciation Expense | 15,000 |
Income Summary now shows credit ₱284,000 − debit ₱210,000 = ₱74,000 credit (net income).
Closing entry (3) — close Income Summary to capital
| Account | Debit | Credit |
|---|---|---|
| Income Summary | 74,000 | |
| Luzon, Capital | 74,000 |
Closing entry (4) — close drawings
| Account | Debit | Credit |
|---|---|---|
| Luzon, Capital | 30,000 | |
| Luzon, Drawings | 30,000 |
Ending capital = ₱200,000 + ₱74,000 − ₱30,000 = ₱244,000, which should already match the Statement of Changes in Equity and balance sheet equity from Element 1.
Post-Closing Trial Balance (TB Type After Closing)
After posting all closing entries, prepare a post-closing trial balance: list every account that still has a balance. Only permanent accounts appear.
Illustrative post-closing TB excerpt — Luzon Services
| Account | Debit | Credit |
|---|---|---|
| Cash | ₱95,000 | |
| Accounts Receivable | 40,000 | |
| Supplies | 5,000 | |
| Equipment | 150,000 | |
| Accumulated Depreciation—Equipment | ₱45,000 | |
| Accounts Payable | 28,000 | |
| Salaries Payable | 7,000 | |
| Luzon, Capital | 244,000 | |
| Totals | … | … |
Notice what is absent: Service Revenue, all expenses, Income Summary, and Drawings. Their absence is the definition of a successful close.
Purpose of the post-closing TB
| Purpose | Detail |
|---|---|
| Equality proof | Debits still equal credits after closing |
| Completeness of closing | No temporary account still shows a balance |
| Bridge to next period | These balances become next period’s opening ledger amounts |
| Error detection | A leftover Sales balance means closing was incomplete |
Common Closing Errors on Assessment Day
| Error | Why it fails |
|---|---|
| Closing drawings into Income Summary | Drawings are equity withdrawals, not expenses; they bypass Income Summary |
| Closing revenues directly to Cash | Cash is permanent; revenues close to Income Summary |
| Forgetting contra-revenues | Sales Returns left open means temporary accounts remain |
| Closing only expenses but not revenues | Income Summary and revenues remain open |
| Posting closing entries but skipping the post-closing TB | Assessor may require the TB-type evidence that only real accounts remain |
| Changing asset balances "to make capital agree" | Capital is updated by closing; do not invent asset plugs |
Written vs practical cues
- Written items often ask which accounts appear on a post-closing TB, or the order of the four closing steps.
- Practical projects require formal general-journal closing entries with explanations, posting to ledgers (or T-accounts), and a balanced post-closing TB on the prescribed form.
Partnership and Corporation Closing Snapshots
Partnership: After steps 1–2, Income Summary ₱90,000 credit closed 60:40 to Ana, Capital and Ben, Capital → credit Ana ₱54,000, credit Ben ₱36,000. Then debit Ana, Capital / credit Ana, Drawings; same for Ben.
Corporation: Income Summary ₱90,000 credit → credit Retained Earnings ₱90,000. Dividends ₱20,000 → debit Retained Earnings ₱20,000, credit Dividends ₱20,000. Share Capital is untouched by routine closing of profit.
Quality Markers Before You Stop
- All revenue and expense accounts show zero in the ledger.
- Income Summary shows zero.
- Drawings / Dividends show zero.
- Capital or Retained Earnings equals the ending equity on the financial statements.
- Post-closing TB debit total equals credit total; only permanent accounts are listed.
Closing and the post-closing trial balance are how bookkeepers finish the period cleanly. They convert Element 1’s reported net income and drawings into updated equity and leave a permanent-account TB ready for the next cycle—exactly the competency continuity TESDA expects after preparing financial reports.
Which account is used as the clearing account when closing revenues and expenses before updating owner’s capital?
How should the owner’s Drawings account be closed at period-end?
Which accounts should appear on a post-closing trial balance?
Luzon Services has Income Summary with a ₱74,000 credit balance after closing revenues and expenses. What is the next closing entry for a sole proprietorship?