Multiple Choice
Which of the following best describes the journal entry to close expense accounts at the end of an accounting period?
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3. Accrual Accounting Concepts
Closing Entries
Multiple Choice
The primary purpose of closing entries is to:
A
Transfer the balances of temporary accounts to retained earnings
B
Prepare the financial statements for the next accounting period
C
Record external transactions with customers and suppliers
D
Adjust asset and liability accounts to their correct balances
Verified step by step guidance1
Understand the concept of closing entries: Closing entries are journal entries made at the end of an accounting period to transfer the balances of temporary accounts (such as revenues, expenses, and dividends) to permanent accounts (like retained earnings). This process resets the temporary accounts to zero for the next accounting period.
Identify the temporary accounts: Temporary accounts include revenue accounts, expense accounts, and dividend accounts. These accounts are used to track financial activity during a specific period and need to be closed to prepare for the next period.
Determine the purpose of closing entries: The primary purpose is to transfer the balances of temporary accounts to retained earnings, which is a permanent account. This ensures that the financial statements reflect the cumulative financial position of the company.
Recognize what closing entries do not accomplish: Closing entries do not prepare financial statements directly, record external transactions, or adjust asset and liability accounts. These tasks are handled by other processes, such as adjusting entries and transaction recording.
Conclude the correct answer: Based on the explanation, the correct purpose of closing entries is to transfer the balances of temporary accounts to retained earnings, ensuring the company's financial records are ready for the next accounting period.
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