Question

Which of the following journal entries is required to close the Income Summary account of a company with a net loss ?

a. Credit Income Summary, debit Retained earnings.
b. Debit Income Summary, credit Retained earnings.
c. Credit Income Summary, debit Dividends.
d. Debit Income Summary, credit Capital Stock.

Answer 1

To close the Income Summary account with a net loss, one must debit Income Summary and credit Retained Earnings to reflect the loss in the company's retained earnings. Therefore, the correct option is B.

Step-by-step explanation:

When a company experiences a net loss, the Income Summary account reflects this by having a credit balance. To close the Income Summary account when there is a net loss, a journal entry is needed that transfers this loss to the Retained Earnings account, which accumulates the company's profit and losses over time. The correct journal entry is Debit Income Summary, Credit Retained Earnings, which increases the Retained Earnings (a credit account) and brings the Income Summary account back to a zero balance.