Multiple Choice
Which of the following entries properly closes a temporary account 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 revenue accounts at the end of the accounting period?
A
Debit Income Summary; Credit Revenue accounts
B
Debit Revenue accounts; Credit Income Summary
C
Debit Revenue accounts; Credit Retained Earnings
D
Debit Retained Earnings; Credit Revenue accounts
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 revenue and expense accounts) to permanent accounts (like retained earnings). This process resets the temporary accounts to zero for the next period.
Identify the accounts involved: Revenue accounts are temporary accounts that need to be closed. The Income Summary account is used as an intermediary step in the closing process, and Retained Earnings is the permanent account where the net income or loss is ultimately transferred.
Determine the correct journal entry: To close revenue accounts, you need to debit the revenue accounts to reduce their balances to zero and credit the Income Summary account to transfer the revenue balance to it.
Understand why the other options are incorrect: For example, 'Debit Income Summary; Credit Revenue accounts' is incorrect because it reverses the direction of the entry. Similarly, 'Debit Revenue accounts; Credit Retained Earnings' skips the intermediary step of using the Income Summary account.
Summarize the correct process: The correct journal entry to close revenue accounts is 'Debit Revenue accounts; Credit Income Summary,' as this properly transfers the revenue balance to the Income Summary account before it is ultimately closed to Retained Earnings.
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