What is Closing Entries?
Closing entries are end-of-period journal entries that transfer the balances of temporary accounts (revenues, expenses, dividends) into retained earnings, resetting the temporary accounts to zero for the next period.
How It Works
- Step 1: close revenue accounts to an Income Summary account.
- Step 2: close expense accounts to Income Summary.
- Step 3: close Income Summary (net income) to retained earnings.
- Step 4: close dividends declared to retained earnings.
Saudi Context
For Saudi companies, closing entries are dated 31 December (or the chosen fiscal year-end) and form the last entries in the accounting cycle before the audited financial statements and ZATCA tax return are prepared. ERP systems like Qoyod execute these automatically once the period is locked.
Example
Closing entries for a Saudi retailer with SAR 800,000 revenue and SAR 600,000 expenses: (1) Dr Revenue 800,000 Cr Income Summary 800,000; (2) Dr Income Summary 600,000 Cr Expenses 600,000; (3) Dr Income Summary 200,000 Cr Retained Earnings 200,000.