Question

You are an accountant for ABC Corp. and need to prepare closing entries for the end of the accounting period. You know that the steps listed below need to be completed. In which order should you complete these steps?I. Close net income to retained earnings.II. Identify all temporary accounts and their balances.III. Prepare one entry for accounts with debit balances.IV. Close dividends to retained earnings.V. Prepare one entry for accounts with credit balances.

A I, III, V, II, IV
B II, V, III, I, IV
C II, IV, V, III, I
D IV, III, V, II, I

Answer 1

The correct sequence for preparing closing entries is to identify all temporary accounts and their balances, prepare entries for accounts with credit and debit balances, close net income to retained earnings, and finally close dividends to retained earnings, which follows Option B: II, V, III, I, IV.

Step-by-step explanation:

The correct order for preparing closing entries at the end of an accounting period is as follows:

1. Identify all temporary accounts and their balances.
2. Prepare one entry for accounts with credit balances.
3. Prepare one entry for accounts with debit balances.
4. Close net income to retained earnings.
5. Close dividends to retained earnings.

This order is in line with generally accepted accounting principles, which dictate that temporary accounts (revenue, expenses, dividends, and income summary) must be closed to determine the retained earnings. It is also important to close revenue and expenses before dividends to accurately reflect the impact of net income on retained earnings before any distributions to shareholders. Therefore, the correct sequence is Option B: II, V, III, I, IV.