Year end closing entries

At the year end every income and expense account is brought to nil and its balance transferred to the profit and loss account, and the resulting profit or loss for the year is transferred to retained earnings for a company or to the owner’s capital account for a sole trader. Balance sheet accounts are not closed: assets, liabilities and equity carry forward as the opening balances of the new year.

What are closing entries for?

Income and expense accounts measure performance for one period. If they were not cleared, next year’s sales would be added to this year’s and no report would show either year’s result. Closing entries reset those accounts to nil and move the year’s result into equity, where it accumulates with the results of earlier years. ACCA’s Financial Accounting syllabus lists balancing and closing the general ledger accounts at the year end as a core skill alongside journals and the trial balance.

The ACCA explanation of the accounting equation shows why this works. Capital includes the capital introduced plus profits and less losses, and drawings reduce it. So assets equal capital introduced plus income less expenses less drawings plus liabilities. Closing entries move income less expenses into the capital or retained earnings line, and the equation still balances.

Which accounts close and which carry forward?

Account type	At the year end	Examples
Income	Closed to profit and loss	Sales, interest received, grants
Expenses	Closed to profit and loss	Purchases, wages, rent, depreciation, corporation tax charge
Assets	Carried forward	Bank, debtors, stock, fixed assets
Liabilities	Carried forward	Creditors, VAT, PAYE, loans, corporation tax owed
Equity	Carried forward after the transfer	Share capital, retained earnings, owner’s capital
Dividends or drawings	Closed to retained earnings or capital	Dividends paid, owner’s drawings

Stock is a special case. ACCA’s article on adjustments to financial statements explains that last year’s closing inventory becomes this year’s opening inventory, is transferred into this year’s cost of sales, and the new closing inventory is then recorded as an asset and a reduction in cost of sales. See stock valuation.

How do the closing entries work in a company?

1. Post all year end adjustments first, then produce a final trial balance.
2. Debit each income account with its balance and credit the profit and loss account.
3. Credit each expense account with its balance and debit the profit and loss account.
4. The balance on the profit and loss account is now the profit or loss for the year. Transfer it to retained earnings.
5. Transfer dividends paid during the year from the dividends account to retained earnings.

FRS 102 paragraph 22.17 says an entity shall reduce equity for the amount of distributions to its owners, so dividends never pass through profit or loss. Paragraph 6.3 requires a statement of changes in equity that reconciles each component of equity from the start to the end of the period, showing separately profit or loss and dividends. In the statutory balance sheet formats in Schedule 1 to the Large and Medium sized Companies and Groups (Accounts and Reports) Regulations 2008, retained earnings appear under capital and reserves as the profit and loss account.

What does a worked example look like?

Illustration only. A company’s final trial balance for the year ended 31 March 2026 shows sales £200,000, cost of sales £120,000, overheads £50,000, a corporation tax charge of £7,500, dividends paid £15,000 and retained earnings brought forward of £40,000.

Closing entry	Debit	Credit
Sales to profit and loss	Sales £200,000	P&L £200,000
Expenses to profit and loss	P&L £177,500	Cost of sales £120,000, overheads £50,000, tax £7,500
Profit for the year to retained earnings	P&L £22,500	Retained earnings £22,500
Dividends to retained earnings	Retained earnings £15,000	Dividends £15,000

Retained earnings carried forward are £40,000 plus £22,500 less £15,000, which is £47,500. On 1 April 2026 every income, expense and dividend account starts at nil, and the balance sheet accounts start with their 31 March balances.

How is it different for sole traders and partnerships?

A sole trader has no retained earnings account. Profit is transferred to the owner’s capital account, and drawings are closed to capital at the same time. ACCA describes drawings as amounts the owner takes out of the business, which reduce capital. The closing capital balance carries forward.

A partnership first transfers profit to an appropriation account, where it is shared according to the partnership agreement, including any salaries and interest on capital. Each partner’s share is credited to their current account, and each partner’s drawings are debited to it. Capital accounts usually stay fixed and current accounts carry the movements.

What has to happen before the books are closed?

Closing entries only move balances, so the balances must be right first. Before closing, post accruals and prepayments, depreciation, the stock adjustment, bad and doubtful debts, the corporation tax charge, and any adjustments needed for events after the reporting period. See accruals and prepayments and events after the reporting period. Reconcile bank, debtors, creditors, VAT and payroll before the final trial balance.

What does accounting software do at the year end?

Most cloud packages do not post visible closing journals. They calculate retained earnings as the sum of all earlier years’ profit and loss balances, so a report dated in the new year automatically shows nil income and expense balances. Older desktop systems run a year end routine that posts the closing journal. Either way, set a lock date once the accounts are final. If an entry is later posted into a closed year, the profit for that year and the retained earnings brought forward both change, and the ledger no longer agrees with the filed accounts. FRS 102 paragraph 10.21 requires material prior period errors to be corrected retrospectively by restating comparatives or opening balances, so the right route is a prior period adjustment, not a quiet change to a locked year.

Why is the retained earnings figure important beyond the books?

Section 830 of the Companies Act 2006 allows a company to make a distribution only out of profits available for the purpose, being its accumulated realised profits less accumulated realised losses. Retained earnings carried forward is the starting point for that test. If closing entries are wrong, dividends may be paid from profits that do not exist. See how to pay dividends legally.

What mistakes come up most often?

• Posting dividends or drawings as an expense, which understates profit.
• Closing the year before the corporation tax charge is accrued, so retained earnings are overstated.
• Posting into a closed year after the accounts are filed, so the opening balances no longer agree with Companies House.
• Opening retained earnings in the new year that do not agree with the closing figure in the signed balance sheet.

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Related Accountapedia entries

• Capital and drawings accounts for sole traders
• Financial statements explained: P&L and balance sheet
• Double entry bookkeeping explained
• Entering opening balances in a new system
• Debits and credits: the rules explained

Sources

• ACCA: FA.FFA%20S25 A26%20syllabus%20and%20study%20guide
• ACCA: Accounting equation
• ACCA: Adjustments financial statements
• Financial Reporting Council: FRS 102 September 2024 tmKYWO6
• legislation.gov.uk: SI 2008/410, schedule 1
• legislation.gov.uk: Act 2006 c. 46, section 830
• ACCA: Accounting for partnerships

Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.