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 closing entry to transfer the balance of the Income Summary account (account number 901) to Retained Earnings on December 31?

Debit Income Summary (901); Credit Cash

Debit Service Revenue; Credit Income Summary (901)

Debit Retained Earnings; Credit Income Summary (901)

Debit Income Summary (901); Credit Retained Earnings

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Verified step by step guidance

Understand the purpose of closing entries: Closing entries are used to transfer the balances of temporary accounts (e.g., revenues, expenses, and dividends) to permanent accounts (e.g., Retained Earnings) at the end of the accounting period.

Identify the role of the Income Summary account: The Income Summary account is a temporary account used to summarize the net income or loss for the period. After all revenue and expense accounts are closed to Income Summary, its balance represents the net income or loss.

Determine the final step in the closing process: Once the Income Summary account has been updated with the net income or loss, its balance must be transferred to the Retained Earnings account, which is a permanent equity account.

Analyze the correct journal entry: To transfer the balance of the Income Summary account to Retained Earnings, you need to debit the Income Summary account (to reduce its balance to zero) and credit the Retained Earnings account (to increase equity).

Verify the correct option: The correct closing entry is 'Debit Income Summary (901); Credit Retained Earnings,' as this action completes the transfer of net income or loss to the Retained Earnings account.