Multiple Choice
Which of the following is the correct closing entry to close 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 all expense accounts at the end of the accounting period?
A
Debit all Expense accounts; Credit Income Summary
B
Debit Retained Earnings; Credit all Expense accounts
C
Debit Income Summary; Credit all Expense accounts
D
Debit all Expense accounts; Credit Retained Earnings
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, expenses, and dividends) to permanent accounts (like retained earnings). This process resets the temporary accounts to zero for the next period.
Identify the accounts involved: Expense accounts are temporary accounts that need to be closed. The Income Summary account is used as an intermediary to facilitate the closing process.
Determine the correct journal entry: To close expense accounts, you need to debit the Income Summary account (to increase its balance) and credit all expense accounts (to reduce their balances to zero). This reflects the transfer of expenses to the Income Summary account.
Understand the logic behind the entry: Debiting Income Summary increases its balance, which will later be used to calculate net income or loss. Crediting expense accounts reduces their balances to zero, preparing them for the next accounting period.
Review the correct answer: The correct journal entry to close all expense accounts is 'Debit Income Summary; Credit all Expense accounts.' This ensures proper transfer of balances and adherence to accounting principles.
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