Final answer:
The major purpose of preparing closing entries is to update the Retained Earnings account by transferring the balances of temporary accounts to it, effectively resetting these accounts for the next period. This ensures that the company's financial statements only reflect the transactions of the current period.
Step-by-step explanation:
The student's question relates to the major purpose of preparing closing entries in accounting. The correct answer to the question is b) update the Retained Earnings account. Closing entries are an essential part of the accounting cycle that serves to transfer the balances of temporary accounts (like revenues, expenses, dividends/distributions, and income summary) to the Retained Earnings account to reflect the changes that occurred over the period. This process resets the balance of the temporary accounts to zero, ready for the next accounting period, while updating the balance of the Retained Earnings to reflect the net income or loss that was earned or incurred during the period.
'T-accounts' help visualize the transactions and balances of accounts including assets, liabilities, and equity. When closing entries are made, we are not adjusting asset or liability accounts (which are permanent accounts) directly. Instead, we close temporary accounts to a permanent equity account, typically Retained Earnings, based on the principle that assets will always equal liabilities plus net worth.
The steps in preparing closing entries generally involve: first, closing all revenue accounts to Income Summary; second, closing all expense accounts to Income Summary; third, closing the Income Summary account to Retained Earnings; and lastly, closing any dividends or distributions to Retained Earnings.