Multiple Choice
Which of the following is the correct journal entry to close the revenue account(s) at the end of the accounting period?
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3. Accrual Accounting Concepts
Closing Entries
Multiple Choice
The purpose of closing entries is to transfer:
A
the balances of temporary accounts to retained earnings
B
assets and liabilities to the capital account
C
cash balances to the revenue account
D
the balances of permanent accounts to the income summary account
Verified step by step guidance1
Understand the concept of closing entries: Closing entries are journal entries made at the end of an accounting period to transfer the balances of temporary accounts (such as revenues, expenses, and dividends) to permanent accounts (such as retained earnings). This process resets the temporary accounts to zero for the next accounting period.
Identify temporary accounts: Temporary accounts include revenue accounts, expense accounts, and dividend accounts. These accounts are used to track financial activity during a specific period and need to be closed to prepare for the next period.
Determine the permanent account: The permanent account that temporary accounts are closed into is typically retained earnings, which is part of the equity section of the balance sheet. Retained earnings represent the accumulated net income of the company after dividends have been paid.
Understand the mechanics of closing entries: Closing entries involve debiting or crediting the temporary accounts to bring their balances to zero. The corresponding credit or debit is made to the retained earnings account. For example, revenue accounts are debited, and retained earnings are credited; expense accounts are credited, and retained earnings are debited.
Clarify the incorrect options: Assets and liabilities are permanent accounts and are not closed; cash balances are not transferred to revenue accounts; permanent accounts are not closed to the income summary account. The correct purpose of closing entries is to transfer the balances of temporary accounts to retained earnings.
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