Multiple Choice
Which of the following is the correct journal entry to close the Income Summary account with a net income at the end of the accounting period?
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3. Accrual Accounting Concepts
Closing Entries
Multiple Choice
The last step in the accounting cycle is to:
A
Post transactions to the ledger
B
Record adjusting entries
C
Prepare a trial balance
D
Prepare closing entries to transfer balances to retained earnings
Verified step by step guidance1
Understand the accounting cycle: The accounting cycle is a series of steps that businesses follow to record and report financial transactions. It begins with identifying transactions and ends with closing the books for the period.
Recognize the purpose of closing entries: Closing entries are made at the end of an accounting period to transfer temporary account balances (e.g., revenues, expenses, and dividends) to permanent accounts like retained earnings. This resets the temporary accounts to zero for the next period.
Identify the accounts involved: Closing entries typically involve revenue accounts, expense accounts, and dividend accounts. These balances are transferred to the retained earnings account, which is part of the equity section of the balance sheet.
Prepare the closing entries: For each temporary account, create a journal entry to transfer its balance to retained earnings. For example, debit revenue accounts and credit retained earnings, and credit expense accounts and debit retained earnings.
Verify the process: After closing entries are posted, check that all temporary accounts have a zero balance and that the retained earnings account reflects the net income or loss for the period, adjusted for dividends.
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