Multiple Choice
The last step in the accounting cycle is to:
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3. Accrual Accounting Concepts
Closing Entries
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When preparing closing entries, what is the correct procedure for closing revenue accounts at the end of the accounting period?
A
Credit each revenue account and debit Retained Earnings.
B
Debit Income Summary and credit each revenue account.
C
Debit each revenue account and credit Income Summary.
D
Credit each revenue account and debit Cash.
Verified step by step guidance1
Understand the purpose of closing entries: Closing entries are used to transfer the balances of temporary accounts (such as revenues, expenses, and dividends) to permanent accounts (such as Retained Earnings) at the end of the accounting period.
Identify the accounts involved: Revenue accounts need to be closed, and their balances are transferred to the Income Summary account. This step ensures that revenue accounts start with a zero balance in the next accounting period.
Determine the correct journal entry: To close revenue accounts, you need to debit each revenue account (to reduce its balance to zero) and credit the Income Summary account (to transfer the revenue balance).
Write the journal entry: For each revenue account, record a debit equal to its balance and a corresponding credit to the Income Summary account. This step ensures the revenue balances are properly transferred.
Verify the process: After closing the revenue accounts, check that their balances are zero and that the total revenue has been correctly transferred to the Income Summary account, which will later be used to close into Retained Earnings.
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