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

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?

Debit Retained Earnings; Credit Income Summary

Debit Income Summary; Credit Retained Earnings

Debit Revenue; Credit Income Summary

Debit Income Summary; Credit Dividends

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Verified step by step guidance

Understand the purpose of closing entries: Closing entries are made at the end of an accounting period to transfer balances from temporary accounts (e.g., Revenue, Expenses, Dividends) to permanent accounts (e.g., Retained Earnings). The Income Summary account is used as an intermediary step in this process.

Review the role of the Income Summary account: After revenues and expenses are closed to the Income Summary account, the net income or net loss is calculated. If there is a net income, the Income Summary account will have a credit balance. If there is a net loss, it will have a debit balance.

Determine the correct journal entry to close the Income Summary account: To close the Income Summary account, its balance must be transferred to Retained Earnings. If there is a net income (credit balance in Income Summary), the journal entry will be: Debit Income Summary; Credit Retained Earnings.

Analyze the options provided: The correct journal entry to close the Income Summary account with a net income is 'Debit Income Summary; Credit Retained Earnings.' This reflects the transfer of net income to Retained Earnings, increasing the equity of the business.

Understand why other options are incorrect: 'Debit Retained Earnings; Credit Income Summary' would decrease Retained Earnings, which is incorrect for net income. 'Debit Revenue; Credit Income Summary' is part of an earlier closing entry, not the final step. 'Debit Income Summary; Credit Dividends' is unrelated to closing net income, as dividends are closed separately.