Table of contents

1. Introduction to Accounting1h 21m
2. Transaction Analysis1h 13m
3. Accrual Accounting Concepts2h 38m
4. Merchandising Operations2h 30m
5. Inventory1h 55m
6. Internal Controls and Reporting Cash1h 16m
7. Receivables and Investments3h 8m
8. Long Lived Assets5h 1m
9. Current Liabilities2h 19m
10. Time Value of Money1h 23m
- Time Value of Money Equations
  35m
- Using Time Value of Money Tables
  47m
11. Long Term Liabilities2h 45m
12. Stockholders' Equity2h 15m
13. Statement of Cash Flows2h 24m
14. Financial Statement Analysis5h 25m
15. GAAP vs IFRS56m

3. Accrual Accounting Concepts

Closing Entries

Financial Accounting

3. Accrual Accounting Concepts

Closing Entries

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Multiple Choice

What is the primary purpose of closing entries in the accounting cycle?

To record the purchase of new assets

To adjust asset and liability accounts to their fair market value

To prepare the trial balance for the next accounting period

To transfer the balances of temporary accounts to retained earnings

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Verified step by step guidance

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 (like retained earnings). This process resets the temporary accounts to zero for the next accounting period.

Identify the purpose of temporary accounts: Temporary accounts are used to track financial activity during a specific accounting period. At the end of the period, their balances must be transferred to permanent accounts to reflect the company's cumulative financial position.

Recognize the role of retained earnings: Retained earnings is a permanent account that accumulates the net income or loss of the company over time. Closing entries ensure that the net income or loss for the period is added to retained earnings.

Understand why temporary accounts are reset: Resetting temporary accounts to zero allows the company to start fresh in the next accounting period, ensuring that financial activity is tracked accurately for each period.

Conclude the primary purpose: The primary purpose of closing entries is to transfer the balances of temporary accounts to retained earnings, not to record asset purchases, adjust accounts to fair market value, or prepare the trial balance for the next period.