Multiple Choice
Why are closing entries in accounting considered a one-time process at the end of each accounting period?
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3. Accrual Accounting Concepts
Closing Entries
Multiple Choice
To which of the following accounts should the balance in the Income Summary account be closed at the end of the accounting period?
A
Dividends
B
Common Stock
C
Cash
D
Retained Earnings
Verified step by step guidance1
Understand the purpose of the Income Summary account: It is a temporary account used during the closing process to summarize revenues and expenses for the period.
Recognize that the Income Summary account is closed at the end of the accounting period to transfer the net income or net loss to the Retained Earnings account, which is a permanent equity account.
Note that Dividends, Common Stock, and Cash are not accounts where the Income Summary balance is closed. Dividends are distributed from Retained Earnings, Common Stock is part of contributed capital, and Cash is an asset account.
Identify that Retained Earnings represents the accumulated profits or losses of the company after dividends are distributed, making it the correct account to close the Income Summary balance into.
Conclude that the closing process involves debiting or crediting the Income Summary account and making the corresponding entry in the Retained Earnings account to reflect the net income or net loss for the period.
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