Multiple Choice
Which of the following is the correct closing entry to close revenue accounts at the end of the accounting period?
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3. Accrual Accounting Concepts
Closing Entries
Multiple Choice
Closing entries are necessary at the end of each accounting period to:
A
Adjust the balances of permanent accounts to zero
B
Prepare the trial balance for the next period
C
Record the purchase of new equipment
D
Transfer the balances of temporary accounts to retained earnings
Verified step by step guidance1
Understand the purpose of closing entries: Closing entries are made at the end of an accounting period to transfer the balances of temporary accounts (such as revenues, expenses, and dividends) to permanent accounts (specifically retained earnings). This ensures that temporary accounts start with a zero balance in the next accounting period.
Identify temporary accounts: Temporary accounts include revenue accounts, expense accounts, and dividend accounts. These accounts are used to track activity for a specific period and must be closed to retained earnings to reflect the net income or loss for the period.
Prepare closing entries: For each temporary account, create a journal entry to transfer its balance to retained earnings. For example, debit revenue accounts to reduce their balance to zero and credit retained earnings. Similarly, credit expense accounts to reduce their balance to zero and debit retained earnings.
Verify the balances: After closing entries are made, check that all temporary accounts have a zero balance. This ensures that they are ready for the next accounting period.
Update the retained earnings account: The net effect of closing entries (revenues minus expenses and dividends) will be reflected in the retained earnings account, which is a permanent account on the balance sheet.
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