How to Record Closing Entries: Step-by-Step IFRS Guide

What are closing entries and why do they matter?

Learning how to record closing entries is the point where the accounting cycle stops being a list of steps and starts becoming a period-close discipline. Closing entries are the [journal entries](/glossary#journal-entry) that reset temporary accounts at the end of an accounting period and transfer the period result into equity.

Temporary accounts measure activity for one period. Revenue, gains, expenses, losses, and dividends do not keep accumulating forever. They tell the story of January, Q1, or the financial year. When that period ends, those balances must be cleared so the next period starts with fresh revenue and expense accounts.

Permanent accounts continue into the next period. Cash, receivables, equipment, payables, share capital, and [retained earnings](/glossary#retained-earnings) stay open because they describe the company’s financial position, not just one period’s performance. This is why closing entries connect the [income statement](/glossary#income-statement) to the statement of changes in equity and the statement of financial position.

IFRS does not prescribe one bookkeeping format for closing entries. IAS 1 focuses on presenting a complete set of financial statements, including profit or loss, changes in equity, and financial position. The closing-entry process is the internal ledger mechanism that helps those statements tie together. If you understand the broader [accounting cycle](/learn/accounting-cycle-steps), closing entries are the final bridge between “we measured profit” and “we updated equity.”

How to record closing entries after the adjusted trial balance

You record closing entries only after the adjusted trial balance is ready. Adjusting entries come first because revenue and expenses must be complete before you close them. If depreciation, accrued salaries, prepaid rent, unearned revenue, or receivable impairment is missing, the closing entries will simply lock in a wrong profit figure.

A clean sequence looks like this:

• Prepare the unadjusted trial balance.
• Record [adjusting entries](/learn/adjusting-entries-guide).
• Prepare the adjusted [trial balance](/glossary#trial-balance).
• Prepare the financial statements.
• Close temporary accounts.
• Prepare the post-closing trial balance.

Many textbooks use an Income Summary account. It is a temporary clearing account that collects revenues and expenses before the net result moves to retained earnings. Some software closes directly to retained earnings behind the scenes, but the Income Summary route is easier for students because it shows the logic.

The standard four-step pattern is:

That order matters. You cannot close Income Summary until revenue and expense accounts have been transferred into it. You also do not close asset or liability accounts, because those accounts are permanent and must carry forward.

Which accounts are temporary and which accounts stay open?

The fastest way to avoid closing-entry mistakes is to classify accounts before you write a debit or credit. Temporary accounts usually live on the income statement or track distributions to owners. Permanent accounts usually live on the statement of financial position or equity section.

Use this table as a decision tool:

This is why closing entries are not the same as posting to the [general ledger](/glossary#general-ledger). Posting happens all period. Closing is a specific end-period reset. If you accidentally close a permanent account, your [balance sheet](/glossary#balance-sheet) will be wrong and the next period will begin with missing assets, liabilities, or equity.

A simple rule works: close performance and distribution accounts, keep position accounts open. Then prove the result with a post-closing trial balance that contains no revenue, expense, gain, loss, or dividend balances.

Worked example: close revenue and expenses to Income Summary

Al Noor Training Center in Riyadh has finished its adjusted trial balance for December. The temporary account balances are:

Step 1 closes revenue. Revenue accounts normally have credit balances, so the closing entry debits each revenue account and credits Income Summary:

Step 2 closes expenses. Expense accounts normally have debit balances, so the closing entry credits each expense account and debits Income Summary:

After these two entries, revenue and expense accounts are zero. Income Summary has a credit balance of SAR 97,000, which equals net income: SAR 225,000 revenue minus SAR 128,000 expenses. If you want more practice reading the statement that produced those numbers, review the [income statement guide](/learn/income-statement-explained).

How to record closing entries for net income and dividends

Once Income Summary contains the net result, close it to retained earnings. In the Al Noor example, Income Summary has a SAR 97,000 credit balance. To close a credit balance, debit Income Summary and credit retained earnings:

Now assume Al Noor declared dividends of SAR 20,000 during the year. Dividends are not an expense. They are distributions to owners, so they reduce retained earnings directly. The closing entry is:

The retained earnings movement is now clear:

This is the connection many students miss. Closing entries do not create profit. Profit was already measured through revenue and expenses under [accrual accounting](/glossary#accrual-accounting). The closing entries transfer that measured result into equity so the next period can start clean. If Al Noor had a net loss instead, the Income Summary account would have a debit balance, and the closing entry would debit retained earnings and credit Income Summary.

Common mistakes when recording closing entries

The first mistake is closing before adjustments are complete. If the accountant has not recorded accrued salaries, depreciation, bank fees, inventory adjustments, or VAT-related accruals, the closing entries will move an incomplete profit number to retained earnings. Closing is not a shortcut around adjustment work.

The second mistake is closing permanent accounts. Cash, accounts receivable, inventory, accounts payable, loans, share capital, and retained earnings must remain open. Retained earnings is affected by closing entries, but it is not reset to zero.

The third mistake is treating dividends as expenses. Dividends are distributions of equity, not operating costs. They do not reduce profit in the income statement. They reduce retained earnings after profit is determined.

The fourth mistake is reversing the Income Summary entry. If Income Summary has a credit balance, that means net income, so debit Income Summary and credit retained earnings. If Income Summary has a debit balance, that means net loss, so credit Income Summary and debit retained earnings.

Also watch for these practical issues:

• Forgetting to close small gain or loss accounts.
• Leaving old revenue balances in the next period.
• Posting the closing entry to the wrong retained earnings account in a multi-entity chart.
• Closing management-reporting accounts that should only be mapped, not posted.
• Skipping the post-closing trial balance.

The post-closing trial balance is your proof. It should show only permanent accounts. If revenue or expense appears, a closing entry is missing or posted incorrectly.

Saudi/Gulf month-end controls before closing the books

In a Saudi or Gulf finance team, closing entries sit inside a wider close checklist. The goal is not only to zero temporary accounts. The goal is to make sure the profit number being transferred to retained earnings is supported by reconciliations, approvals, and source documents.

Before closing, check these areas:

Do not use closing entries to hide unresolved differences. If the supplier ledger does not agree to the general ledger, fix the reconciliation first. If the VAT return is not tied to the ledger, document the difference before closing. If depreciation has not been calculated, record it before closing expenses.

For IFRS reporting, IAS 1 requires the financial statements to present performance, financial position, cash flows, and changes in equity as a connected set. A disciplined close process protects that connection. The [balance sheet guide](/learn/balance-sheet-guide) shows the position side; closing entries update the equity bridge after the period’s performance is measured.

Practice closing entries until the flow becomes automatic

Closing entries become easy when you stop memorizing isolated debits and start seeing the flow. Temporary accounts collect activity. Income Summary gathers the net result. Retained earnings carries that result forward. Dividends reduce retained earnings without touching expenses. The post-closing trial balance proves that only permanent accounts remain.

When practicing, ask five questions before writing the entry:

• Is this account temporary or permanent?
• Does the account have a debit or credit balance before closing?
• Am I closing revenue, expenses, Income Summary, or dividends?
• Should retained earnings increase or decrease?
• Will the post-closing trial balance contain only permanent accounts?

Then write the entry and explain the effect in words. For example: “I debit revenue to remove its credit balance, and I credit Income Summary to collect the period’s revenue.” That sentence matters because it proves you understand the movement, not just the table.

Accountery is useful here because closing entries are exactly the kind of skill that improves through repeated, feedback-rich practice. Work through [journal entry practice](/learn/how-to-record-journal-entries), trial balance checks, and month-end close scenarios until the sequence feels natural. The next time a worksheet asks how to record closing entries, you will not be guessing. You will be moving balances with a purpose.