Multiple Choice
Which of the following journal entries correctly closes income statement accounts with credit balances at the end of the accounting period?
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3. Accrual Accounting Concepts
Closing Entries
Multiple Choice
The purpose of closing entries is to transfer:
A
assets and liabilities to the capital account
B
the balances of temporary accounts to retained earnings
C
cash balances to the revenue account
D
the balances of permanent accounts to the income summary account
Verified step by step guidance1
Understand the purpose of closing entries: Closing entries are used in accounting to reset the balances of temporary accounts (such as revenues, expenses, and dividends) to zero at the end of an accounting period. This ensures that these accounts start fresh for the next period.
Identify the temporary accounts: Temporary accounts include revenue accounts, expense accounts, and dividend accounts. These accounts are closed to prevent their balances from carrying over to the next accounting period.
Determine where the balances are transferred: The balances of temporary accounts are transferred to a permanent account, typically the Retained Earnings account, which is part of the equity section of the balance sheet.
Understand the process of closing entries: The process involves four steps: (1) Close revenue accounts to the Income Summary account, (2) Close expense accounts to the Income Summary account, (3) Close the Income Summary account to Retained Earnings, and (4) Close the Dividends account (if applicable) to Retained Earnings.
Recognize 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 that the financial statements reflect accurate and updated information for the next accounting period.
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