Multiple Choice
Which of the following accounts is included in a closing entry at the end of an accounting period?
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3. Accrual Accounting Concepts
Closing Entries
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?
A
Debit Income Summary (901); Credit Cash
B
Debit Service Revenue; Credit Income Summary (901)
C
Debit Retained Earnings; Credit Income Summary (901)
D
Debit Income Summary (901); Credit Retained Earnings
Verified step by step guidance1
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.
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