What does the closing entry do?
Income and expense accounts measure one year. On the first day of the next year they must start again from zero. The closing entry does that, and it puts the difference between them, the net income, into equity.
Balance sheet accounts are not closed. Cash, loans and equity carry forward.
What does it look like?
Example numbers: revenue of 200,000.00 and expenses of 150,000.00, so net income is 50,000.00.
| Account | Debit | Credit |
|---|---|---|
| Revenue | 200,000.00 | |
| Expenses | 150,000.00 | |
| Retained earnings | 50,000.00 |
After it posts, revenue and expenses are at zero and retained earnings is 50,000.00 higher.
For a sole proprietor the credit goes to the owner’s equity account. For a partnership it is divided among the partners’ capital accounts under the partnership agreement.
Who posts it?
Usually the software. Many systems do not post a visible journal entry at all: they calculate retained earnings as the sum of all prior years’ net income whenever you run a report. Others post a real entry when you close the year.
Either way, you do not type it by hand. Typing a closing entry into a system that also does it automatically closes the year twice.
What should I check afterwards?
One equation:
Opening retained earnings this year = opening retained earnings last year + last year’s net income − last year’s distributions.
That is the retained earnings total on last year’s balance sheet.
Compare it with the balance sheet you issued for last year. If the numbers differ, a prior-year transaction was changed after the fact. That is the most common year-end surprise, and it is why a finished year should be locked.
What goes wrong most often?
- A prior year was edited after closing. Retained earnings moves, and nobody can say when.
- An entry was posted straight to retained earnings to make something agree.
- Draws were left open. The draw account keeps growing across years instead of closing into equity.
How does LedgerDock handle year end?
Locking the period that ends on the fiscal year end posts the closing entry: every income and expense account is zeroed into Retained Earnings. Draw and distribution accounts are not closed by that entry. Because a locked year cannot be changed, the opening balance of the next year stays what you reported. A correction is a new entry in the open period.