Multiple Choice
Which of the following accounts is NOT closed to Income Summary when preparing closing entries as of August 31 under the perpetual inventory system?
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3. Accrual Accounting Concepts
Closing Entries
Multiple Choice
Which of the following is the correct entry to close income statement accounts with debit balances at the end of the accounting period?
A
Debit the expense accounts and credit Income Summary.
B
Debit the revenue accounts and credit Income Summary.
C
Credit the expense accounts and debit Income Summary.
D
Credit the revenue accounts and debit 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 expense accounts) to permanent accounts (like retained earnings or Income Summary). This resets the temporary accounts to zero for the next period.
Identify the accounts with debit balances: In the income statement, accounts with debit balances are typically expense accounts. These need to be closed by crediting them to reduce their balance to zero.
Determine the account to transfer balances to: The balances of the expense accounts are transferred to the Income Summary account, which acts as a temporary holding account before transferring the net income or loss to retained earnings.
Record the closing entry for expense accounts: To close expense accounts, you need to credit each expense account (to reduce its balance to zero) and debit the Income Summary account (to increase its balance by the total of the expenses).
Verify the entry: Ensure that the total debits equal the total credits in the closing entry. This maintains the balance in the accounting equation and prepares the accounts for the next period.
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