Final answer:
Option 4) All of the above is correct because resetting accounts to zero balances provides clear and accurate financial reporting, maintains the integrity of records, and facilitates financial statement preparation. However, permanent accounts like assets, liabilities, and stockholders' equity do not get reset to zero but carry forward their balances.
Step-by-step explanation:
The correct answer to the student's question is option 4) All of the above. Resetting assets, liabilities, and stockholders' equity accounts to zero balances at the beginning of a new accounting period helps in multiple ways:
- To ensure accurate financial reporting: Starting with a clean slate ensures that the financial activity for only the current period is recorded and reported, preventing double-counting transactions from prior periods.
- To maintain the integrity of the accounting records: This practice helps in segregating transactions by their respective accounting periods, which is crucial for analysis and auditing.
- To facilitate the preparation of financial statements: With zero balances in temporary accounts (revenues, expenses, and dividends), accountants can correctly summarize the financial activity for the new period on the income statement and the retained earnings statement.
It's important to note that this practice of resetting balances applies to certain temporary accounts (like revenues, expenses, and dividends), not typically to the permanent accounts such as assets, liabilities, and stockholders' equity, which carry their ending balances into the next period.