Closing entries in accounting

By the time you reached the end of the accounting year, you probably feel like you’ve done it all. You’ve recorded journal entries for revenue recognition, inventory movements, payroll. You’ve made your adjusting entries for accruals and prepaids. You produced a trial balance and made error corrections. Prepared the financial statements. That’s pretty much it, right? No, there’s one more thing you need to do before you can start the new accounting period: preparing the closing entries. It’s the accounting equivalent of saying “Happy New Year”!
⏱️TIMESTAMPS⏱️
0:00 Introduction to closing entries
0:37 Debits and credits
1:02 Permanent accounts and temporary accounts
1:42 Trial balance after corrections
3:21 Closing entries for temporary accounts
5:18 Income summary account and retained earnings
5:48 Closing entries for dividend accounts
6:18 Post-close trial balance
In a previous video, I covered understanding debits and credits in accounting by using DC ADE LER. DC Debits and Credits. ADE Assets Dividends Expenses, accounts that usually have a debit balance. LER Liabilities Equity Revenue, accounts that usually have a credit balance. Let’s group the accounts slightly differently: into permanent accounts and temporary accounts. Assets, Liabilities and Equity are permanent accounts, their account balance carries over to the next period. Dividend, Expenses and Revenue are temporary accounts, these accounts have to be reset to zero prior to starting a new accounting period. That’s what closing entries do: closing the temporary accounts to a balance of zero, and transferring the outstanding balance to one of the permanent accounts (more specifically Equity).
Philip de Vroe (The Finance Storyteller) aims to make #accounting , finance and investing enjoyable and easier to understand. Learn the business and accounting vocabulary to join the conversation with your CEO at your company. Understand how financial statements work in order to make better investing decisions. Philip delivers #financetraining in various formats: KZbin videos, classroom sessions, webinars, and business simulations. Connect with me through Linked In!
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[@TheFinanceStoryteller]

Enjoyed this video? Then please subscribe to the channel, and let's review debits and credits DC ADE LER in more detail kzbin.info/www/bejne/mGqWfHWjmL2UpKs and/or learn more about preparing a trial balance kzbin.info/www/bejne/iaGkqHyViLh3frs

[@user-el8gk9oz5x]

Helpful tip - if you switch the letters around at 1:00 it spells out the acronym DEALER to help remember whats a debit and whats a credit. DEA on left (debits), LER on right (credits)

[@TheFinanceStoryteller]

Good one! Whatever works for you to remember it. 😎

[@papichino_3377]

You're a lifesaver I got an exam a while ago about closing entries I knew nothing then after watching this vid it was pretty basic after all lol i got a 38/40

[@TheFinanceStoryteller]

Wow! Well done! Congratulations. So happy to hear that. Hope you will find more useful information on my channel for future exams, here's the link to the playlist with intermediate accounting videos: kzbin.info/www/bejne/onPZn4adfqyJpLc

[@kellypiltz8878]

That's awesome! Hopefully I pass mine but this vid helped me so much

[@konstancyja82]

You are master of visuals and easy explanation! Such a high value information!

[@TheFinanceStoryteller]

Wow, thank you!

[@styrofoamx229]

That was AMAZING the way you broke this down was just amazing can't find any other word to describe it, straight to the point, simple, concise. Thank you I just subbed and will be binging all your videos for my accounting for decision making class!

[@TheFinanceStoryteller]

Wonderful to hear that. Please share the link to the video and the channel with your fellow students, and have a look at the following playlists to see if there are any more videos that could help you: Accounting 101 kzbin.info/www/bejne/mGqWfHWjmL2UpKs&pp=gAQBiAQB Intermediate accounting kzbin.info/www/bejne/onPZn4adfqyJpLc&pp=gAQBiAQB

[@dilhack2682]

Just want to stop by your most recent video to let you know I’m binge watching most of them 😁 I’m in the middle of Intermediate Accounting 1 and your way of describing things is helping immensely! Thank you for the hard work - best wishes for your channel!

[@TheFinanceStoryteller]

Great to hear that! Happy to help. :-) Please subscribe, and tell your friends and colleagues about the channel! Are there any topics that you think I should cover in upcoming videos?

[@dilhack2682]

@@TheFinanceStoryteller I missed your comment before...I’ve moved on to the next accounting class now. It goes over a lot on debt and equity investments, derivatives, taxes, and a ton of other stuff...the subject matter is incredibly broad...

[@TheFinanceStoryteller]

@@dilhack2682 Good to hear from you again! Two videos immediately jump to mind that could help you: financial derivatives explained kzbin.info/www/bejne/fpDVeIFrrLSerLs and deferred tax assets kzbin.info/www/bejne/g6e7cp-ghqlnf6s Other than that, try doing a search on KZbin by typing the topic you are looking for and adding "finance storyteller" to it. For some videos, I even forgot that I ever made them. ;-)

[@dilhack2682]

@@TheFinanceStoryteller thank you!

[@TheFinanceStoryteller]

@@dilhack2682 You're welcome! Let me know if you come across topics in your class that you think might be good for me to cover in a video.

[@dooham1383]

Super clear explanation! Came here after my tutorial which was super confusing. Thank you!!!!!

[@TheFinanceStoryteller]

Great to hear! Yeah, closing entries are not that hard if you know what you are trying to achieve by recording them. Please spread the word to fellow students! 🙂

[@ima2020presidentcandidate]

Great video and explained very well! Thank you so much!!

[@TheFinanceStoryteller]

So happy to hear that, Christian! Thanks for the kind words.

[@bethaniewarren7199]

Great video helped me a lot with my accounting class! Thank you!!

[@TheFinanceStoryteller]

So happy to hear that, Bethanie! Please share with your fellow students. I hope you find some more videos on this channel that are helpful to you!

[@aryanrahman3212]

Please make more videos!!!! You are great at these explanations

[@TheFinanceStoryteller]

Thank you, Aryan! I am aiming for one or two new videos per week.

[@user-wo7lh3yj9n]

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[@TheFinanceStoryteller]

Glad to hear that! You've found me! 😉 Hope you find lots of useful stuff on my channel, there's 200+ videos for you to browse through.

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[@TheFinanceStoryteller]

Nice! Please subscribe, and share with friends and colleagues.

[@wesleyc1125]

Thanks so much for making this video. It was easy to understand and I appreciate that a lot.

[@TheFinanceStoryteller]

Glad it was helpful, Wesley! Please subscribe to the channel, and spread the word!

[@mm57390]

This dude made this so simple

[@TheFinanceStoryteller]

Happy to help!

[@xavier.antony]

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[@TheFinanceStoryteller]

My pleasure 😊 One of rare occassions where I make a guest appearance in my own video!!!

[@jordanfreedivers9979]

Perfect explaining 👏👏

[@TheFinanceStoryteller]

Glad it was helpful! Please subscribe, and check out my intermediate accounting playlist, there might be more useful videos for you: kzbin.info/www/bejne/a2imhIdslLenjc0

[@harikrishnagupta284]

Excellent, Thank you 🤝

[@TheFinanceStoryteller]

My pleasure! :-)

[@ragam.abhinavyadav4856]

Thank u sir for explaining 🤗 closing entries

[@TheFinanceStoryteller]

You're welcome, Abhinav!

[@Bean-lb9nb]

Great explanation. Thanks

[@TheFinanceStoryteller]

Happy to help! There are many related videos in my playlists on accounting, such as this related video on adjusting entries kzbin.info/www/bejne/a2imhIdslLenjc0&pp=gAQBiAQB Have a look through it, and watch whatever might be useful to you.

[@user-od3ou8qf9o]

Very helpful! Thank you so much :)

[@TheFinanceStoryteller]

Great to hear that! More useful videos in these playlists, have a browse through them: Accounting 101 kzbin.info/www/bejne/mGqWfHWjmL2UpKs&pp=gAQBiAQB Intermediate Accounting kzbin.info/www/bejne/onPZn4adfqyJpLc&pp=gAQBiAQB

[@fifilalo4405]

Thank you so much for the explanation

[@TheFinanceStoryteller]

Glad it was helpful!

[@UltimateFreekickerzdok]

Than you so much! What a great explanation

[@TheFinanceStoryteller]

You're very welcome!

[@user-fz9pm9ct5j]

Thank you so much I am a college student it Taiwan and this really helped me so much !

[@TheFinanceStoryteller]

Wonderful to hear that! Wishing you lots of success in your studies.

[@shailjasingh2146]

I can finally skip my night class coz I have already covered the chap 4 in acct 110. thank you so much

[@TheFinanceStoryteller]

Work hard and work smart! :-)

[@jongcheulkim7284]

Thank you. This is very helpful.

[@TheFinanceStoryteller]

Happy to hear that. Thank you for watching and commenting. 🙂

[@lisateariki6667]

wooow, this explaination was soo good, thankyou very much sir

[@TheFinanceStoryteller]

Thank you so much, Lisa! Very happy to hear that. Please subscribe to the channel, I might have a few more accounting videos that are useful for you, such as the videos in this playlist: kzbin.info/www/bejne/mGqWfHWjmL2UpKs

[@riverfate1480]

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[@TheFinanceStoryteller]

Happy to help! Thank you for watching and commenting.

[@antonioromero878]

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[@TheFinanceStoryteller]

You're welcome!

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[@TheFinanceStoryteller]

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[@TheFinanceStoryteller]

My pleasure!

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[@TheFinanceStoryteller]

Wow. Thanks for the kind words, Abubakker! Much appreciated.

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[@TheFinanceStoryteller]

You're welcome, Tekabech! :-)

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[@TheFinanceStoryteller]

Thank you, Jeron!

[@jamilhfl]

❤

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thanks

[@mashallkeenan4124]

really helpful bos

[@TheFinanceStoryteller]

Glad to hear that 😊 Please share with friends and colleagues!

[@ChatGPT486]

Is not retained earnings account shown as separate in post close trial balance ?

[@TheFinanceStoryteller]

Yes, that is probably a good thing to do.

[@KyleXLS]

Is it safe to expect that most accounting softwares, like Xero and QBO, will do most if not all closing procedures for you? With the exception of adjusting entries

[@TheFinanceStoryteller]

Hi Kyle! Yes, many of those steps have been automated in accounting software. I have no specific experience with Xero and QBO though, so can't tell you specifically what is or is not included.

[@abubakkerafridi6200]

And thank you sooo much

[@TheFinanceStoryteller]

You're welcome! Happy to help!

[@classiccatastrophe1518]

Awesome

[@TheFinanceStoryteller]

Thank you, Kajanan! Happy to hear that.

[@sardsetech7977]

Thank you

[@TheFinanceStoryteller]

Happy to help!

[@accountingfinanceplusfunny]

Please answer this its interesting question....what if the company received its account receivable account....then we will make adjustment on it at the end of the accounting period then A/R become =0....so in those case A/R account hasn't transferred to the next accounting periods...so can we still consider it as permanent account or a temporary one?

[@TheFinanceStoryteller]

Whether an account is a temporary or a permanent one, is decided by its nature rather than its balance. Assets, Liabilities and Equity are permanent accounts. Dividend, Expenses and Revenue are temporary accounts. A/R is an asset account.

[@ShakeelAhmad-by4wn]

Thanku. So much

[@TheFinanceStoryteller]

Most welcome, Shakeel!

[@kisemboFAandQT]

I kindly request clarity on this; you said that we post-closing entries after finishing the financial statements. does this mean that financial statements are prepared without knowing the value of the retained earnings? what should come before the other? is it closing entries, then financial statements? or vice versa. in my thinking, I think closing entries help update the capital account or retained earnings account, which then helps with preparing full financial statements. please kindly elaborate on this.

[@TheFinanceStoryteller]

You are right. The sequence is: Prepare income statement. Perform closing entries. Prepare balance sheet.

[@bailiojaycee233]

Wait is the income summary stated here an account?

[@TheFinanceStoryteller]

Yes, it's an account that is not used in day-to-day accounting entries, it's purely a "technical" account that helps to transition amounts from temporary accounts to retained earnings.

[@CR250RidR]

accounting software (Xero/Quickbooks) does this all automatically right?

[@TheFinanceStoryteller]

Yes, that should be an automated run, although I have not specifically used Xero or Quickbooks, so cannot tell you which buttons to press to make it happen.

[@abbylima6077]

That what I am trying to figure out. How to do it in accounting software

[@jujuu2k]

What exactly is the reason temporary accounts must be closed ?

[@TheFinanceStoryteller]

To start with a clean slate at the start of the new accounting year.

[@vikashbarnwal4840]

Hi please one video on provision, reserve,

[@TheFinanceStoryteller]

Hello Vikash! What I have to offer in that area for now is my video on accruals kzbin.info/www/bejne/onPZn4adfqyJpLc

[@blast2686]

Is this your first face reveal? Edit: Oh never mind. You already did that in your previous video

[@TheFinanceStoryteller]

Yep. Felt like doing some "personal introductions" to the topics. Does it work?

[@hilalattouleh4637]

I always think of where the account is going so I do debits first anyone else do it that way too?

[@donsonmukiza2502]

Thank you!

[@TheFinanceStoryteller]

You're welcome!