Multiple Choice
Which of the following is the correct entry to close income statement accounts with debit balances at the end of the accounting period?
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3. Accrual Accounting Concepts
Closing Entries
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?
A
Debit Retained Earnings; Credit Income Summary
B
Debit Income Summary; Credit Retained Earnings
C
Debit Revenue; Credit Income Summary
D
Debit Income Summary; Credit Dividends
Verified step by step guidance1
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.
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