Multiple Choice
When preparing closing entries, what is the correct procedure for closing revenue accounts 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 the revenue account(s) at the end of the accounting period?
A
Debit Revenue; Credit Retained Earnings
B
Debit Income Summary; Credit Revenue
C
Debit Income Summary; Credit Expenses
D
Debit Revenue; Credit Income Summary
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 expenses) to permanent accounts (like retained earnings). This process resets the temporary accounts to zero for the next period.
Identify the accounts involved: In this case, the revenue account needs to be closed. The revenue account has a credit balance, so to close it, you need to debit the revenue account to bring its balance to zero.
Determine the account to credit: The revenue account's balance is transferred to the Income Summary account during the closing process. Therefore, you need to credit the Income Summary account.
Write the journal entry: The journal entry to close the revenue account is: Debit Revenue; Credit Income Summary. This reflects the transfer of the revenue balance to the Income Summary account.
Understand the flow of closing entries: After closing the revenue account, the Income Summary account will eventually be closed to Retained Earnings, and expenses will also be closed to the Income Summary account. This ensures all temporary accounts are reset for the next accounting period.
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