Multiple Choice
At the end of the year, where are all income and expense account balances transferred during the closing entries process?
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3. Accrual Accounting Concepts
Closing Entries
Multiple Choice
Which of the following is the correct journal entry to close the Dividends account at the end of the accounting period?
A
Debit Dividends; Credit Income Summary
B
Debit Retained Earnings; Credit Dividends
C
Debit Income Summary; Credit Dividends
D
Debit Dividends; Credit Retained Earnings
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 (like Dividends, Revenues, and Expenses) to permanent accounts (like Retained Earnings). This ensures that temporary accounts start with a zero balance in the next period.
Identify the nature of the Dividends account: Dividends represent distributions to shareholders and reduce Retained Earnings. It is a temporary account that needs to be closed to Retained Earnings at the end of the period.
Determine the correct accounts to use: To close the Dividends account, you need to debit Retained Earnings (to reduce it) and credit Dividends (to zero out its balance). This reflects the reduction in Retained Earnings due to dividends paid.
Write the journal entry: The journal entry to close the Dividends account is: Debit Retained Earnings; Credit Dividends. This entry transfers the balance of the Dividends account to Retained Earnings.
Verify the impact of the entry: After posting this journal entry, the Dividends account will have a zero balance, and the reduction in Retained Earnings will be accurately recorded in the financial statements.
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