--- title: "Closing Entries to Retained Earnings: Year-End Example | MCC" description: "At year end, revenue and expense accounts close into retained earnings. Step by step: $200,000 of revenue less $150,000 of expenses moves $50,000." url: "https://mcc-solutionsnj.com/bookkeeping/guides/closing-entries-and-retained-earnings" --- Bookkeeping guide · Updated October 12, 2026 # Closing Entries and Retained Earnings Explained At the end of a fiscal year, income and expense accounts start fresh at zero while the balance sheet carries on. The bridge between the two is the closing process, which moves the year's profit into retained earnings. By [Matthew Coleman](/about), MCC Solutions **Quick answer.** Closing entries zero out income and expense accounts at the end of the year and move the year's profit into retained earnings, so each year starts fresh while assets, liabilities and equity carry forward. **Example.** A year ends with $200,000 of revenue and $150,000 of expenses. Closing the revenue and expense accounts moves the $50,000 difference into retained earnings: debit Income Summary $50,000 and credit Retained Earnings $50,000. Want this handled for you? Monthly bookkeeping, cleanup and year-end close for small businesses. Start with a free health check of your books. [Free health check](/bookkeeping/health-check)[Get a quote](/bookkeeping/#interest) **Related:** [Void vs delete a transaction](/bookkeeping/guides/voiding-vs-deleting-transactions) · [NJ 1099 contractor rule (ABC test)](/bookkeeping/guides/nj-independent-contractor-rule-abc-test-2026) · [Trial balance explained](/bookkeeping/guides/trial-balance-explained) **Free tools:** [Current ratio calculator](/bookkeeping/current-ratio-calculator) · [ROI and payback calculator](/bookkeeping/roi-and-payback-calculator) [![Intuit ProAdvisor Gold tier badge](/img/credentials/intuit-proadvisor-gold.png)](https://proadvisor.intuit.com/app/accountant/search?searchId=matthew-coleman77)Gold tier in Intuit's ProAdvisor program. [See my Intuit listing](https://proadvisor.intuit.com/app/accountant/search?searchId=matthew-coleman77) Keeping your own books? Tallyfinch does invoices, bank import and reports on your computer. [See Tallyfinch](/bookkeeping/mcc-books-downloadable-bookkeeping-software) ## Temporary and permanent accounts Income and expense accounts are temporary. They measure a period, so they reset each year. Assets, liabilities and equity are permanent and carry their balances forward. If expenses were never reset, next year's profit would include this year's. The reset makes each year stand alone. ## How the closing works Traditionally, an accountant makes closing entries: income accounts are debited to zero, expense accounts are credited to zero, and the difference goes to retained earnings. If the business made a profit, retained earnings increases. A loss reduces it. Accounting software does this automatically. On the first day of the new year the profit and loss shows zero and the previous year's profit appears in retained earnings. ## What retained earnings means It is the cumulative profit kept in the business after owner draws or dividends. For sole proprietors and partnerships, equity may be shown differently, with draws closing directly into owner equity. For corporations, dividends reduce retained earnings. A negative retained earnings balance means total losses and distributions exceed past profits. That can be fine for a young company, but it is a point lenders note. ## Want us to handle it? We close the year with you: accounts reconciled, 1099s sorted, and books your tax preparer can use. **Price:** Free review of your books first, then a written quote before any work starts. [Get a free review and quote](/bookkeeping/#interest) [1099 and year-end cleanup](/bookkeeping/1099-and-year-end-books-cleanup) ## Locking the year After your tax preparer finishes, set a closing date in the software. Changes to the prior year can alter retained earnings and break agreement with filed returns. If a correction is genuinely needed, discuss with your preparer first and make a dated entry. Late adjustments, like a missed depreciation entry, change the previous year's profit, and so change retained earnings. Track them carefully. ## Common problems Retained earnings that differ from the prior year's ending equity may point to edits in a closed period, an incorrect opening balance after converting software, or an equity account that was used as a catch-all. Compare the prior year's balance sheet with the start of the current year. If you changed software or accountants, ask for a reconciliation of opening equity to the final tax return, so you know the numbers tie. ## A short example Suppose a business ends the year with income of one amount and expenses of a smaller amount. After closing, the profit lands in retained earnings and the profit and loss starts the new year at zero. If the owner had also taken draws, those reduce equity separately. When you open the balance sheet in January, retained earnings equals the prior balance plus last year's profit, and any difference from the tax return should be explained before you start a new year of entries. Keep both the final tax return and the closing balance sheet together in a year folder. Matching the two each year is an easy way to catch edits that should not have happened. ## Worked example with numbers A business has income of $120,000 and expenses of $97,000 for the year, so net income is $23,000. Retained earnings started the year at $15,000. After closing, retained earnings is $15,000 + $23,000 = $38,000, or $38,000 minus any distributions that close through it. If the owner took $10,000 of distributions through retained earnings, it ends at $28,000. The new year's profit and loss starts at zero. If your balance sheet shows a different ending retained earnings than the prior-year tax return workpapers, look for edits in a closed year. ## Check your work Compare opening retained earnings to last year's ending figure every January, and lock the closed year. ## Common questions **Do I make closing entries manually?** Not in most software. It rolls profit forward automatically. **Why did retained earnings change after year end?** Because someone edited a prior-year transaction. Review the activity log. **Is retained earnings cash?** No. It is an accounting balance. Cash may have been spent on assets or draws. This guide is general information, not tax, legal or accounting advice. Rules, fees and due dates change; check with the IRS, the NJ Division of Taxation or a licensed professional for your situation. Let us handle it [### Monthly bookkeeping Categorizing, reconciling and monthly reports, with cleanup, payroll and NJ filings available. 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Xero →](/bookkeeping/software/xero) More guides - [Cost of Goods Sold Explained for Small Business](/bookkeeping/guides/cost-of-goods-sold-explained) - [Gross Margin vs Markup: Stop Mixing Them Up](/bookkeeping/guides/gross-margin-vs-markup) - [Break-Even Analysis: How Much Must You Sell?](/bookkeeping/guides/break-even-analysis-for-small-business) - [Receipts and Documentation: Habits That Save Tax Time](/bookkeeping/guides/expense-receipts-and-documentation-habits) Free tool - [Bookkeeping health check](/bookkeeping/health-check) [All guides](/bookkeeping/guides) Reach small business owners, freelancers and bookkeepers who read this guide: [advertise here](/advertise#bookkeeping). [![Cover of Bookkeeping Fundamentals (ebook) by Matthew Colt](/img/toolkits/bookkeeping-fundamentals-ebook/cover.webp)](/toolkits/bookkeeping-fundamentals-ebook) From the bookshelf ### Bookkeeping Fundamentals A college-level bookkeeping course, without the tuition. By Matthew Colt, $9.99 as an ebook (EPUB and PDF). [See the book](/toolkits/bookkeeping-fundamentals-ebook) [Read the first pages free](/toolkits/bookkeeping-fundamentals-ebook#free-starter) Excel workbook ### Month-End Close Workbook A real month-end close in one Excel file. It tells you when a rec does not tie, which variances still need an answer, and when the period is ready to lock. [See what is inside ($19)](/toolkits/month-end-close-workbook) ## Rather have us keep the books? Ask for a quote. [Get a Quote](/bookkeeping/#interest)[Call (908) 444-6373](tel:+19084446373)