Multiple Choice
Select the statement below that explains how to use the Income Summary account during the closing process:
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3. Accrual Accounting Concepts
Closing Entries
Multiple Choice
At the end of the year, what is included in the closing entry to close a revenue account?
A
A debit to the revenue account and a credit to Income Summary
B
A debit to the revenue account and a credit to Retained Earnings
C
A credit to the revenue account and a debit to Retained Earnings
D
A credit to the revenue account and a debit to Income Summary
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 (like revenues, expenses, and dividends) to permanent accounts (like Retained Earnings). This resets the temporary accounts to zero for the next period.
Identify the nature of the revenue account: Revenue accounts have a normal credit balance. To close a revenue account, you need to bring its balance to zero by debiting it for the same amount as its current credit balance.
Determine where the revenue account balance is transferred: The balance of the revenue account is transferred to the Income Summary account, which is a temporary account used to summarize revenues and expenses before transferring the net income or loss to Retained Earnings.
Record the closing entry for the revenue account: Debit the revenue account to reduce its balance to zero, and credit the Income Summary account for the same amount to reflect the transfer of revenue.
Verify the entry: Ensure that the debit to the revenue account equals the credit to the Income Summary account, maintaining the accounting equation's balance.
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