Multiple Choice
Which of the following best explains why temporary accounts must start each fiscal period with a zero balance?
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3. Accrual Accounting Concepts
Closing Entries
Multiple Choice
Which of the following entries properly closes a temporary account at the end of the accounting period?
A
Debit Service Revenue; Credit Retained Earnings
B
Debit Income Summary; Credit Cash
C
Debit Service Revenue; Credit Income Summary
D
Debit Retained Earnings; Credit Service Revenue
Verified step by step guidance1
Understand the concept of temporary accounts: Temporary accounts include revenue, expense, and dividend accounts. These accounts are closed at the end of the accounting period to transfer their balances to permanent accounts, such as Retained Earnings.
Identify the correct closing process: Revenue accounts are closed by debiting the revenue account and crediting the Income Summary account. This step transfers the revenue balance to the Income Summary account.
Recognize the role of the Income Summary account: The Income Summary account is a temporary account used to summarize revenues and expenses. After transferring revenue and expense balances to this account, it is closed to Retained Earnings.
Analyze the options provided: The correct entry for closing a revenue account is 'Debit Service Revenue; Credit Income Summary,' as this properly transfers the revenue balance to the Income Summary account.
Verify the closing process: After closing all temporary accounts (revenues, expenses, and dividends), the Income Summary account is closed to Retained Earnings, ensuring that the net income or loss is reflected in the permanent equity account.
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