Question

The following are reasons to close the accounts at the end of the year except?

1) to prepare the accounts for the next accounting period
2) to update the capital account
3) to close all real accounts
4) to close all nominal accounts

Answer 1

Account closure at the end of the year is done to prepare accounts for the next period, update the capital account, and close all nominal accounts. The one exception is that real accounts are not closed but carry their balances forward. Hence, the correct answer is option 3.

Step-by-step explanation:

The question pertains to the common practice of closing accounts at the end of an accounting period. When we close accounts, we are primarily doing this for three main reasons.

Firstly, this action prepares the accounts for the next accounting period, by zeroing out revenue and expense accounts to start fresh.

Secondly, closing accounts helps update the capital account (also known as the owner's equity account) with the company's earnings or losses recorded for the period.

Thirdly, it involves closing out all nominal accounts, which include revenue, expense, dividends (or withdrawals), and income summary accounts.

The one exception to these reasons, and the answer to the student's question, is to close all real accounts. Real accounts, also known as permanent accounts, such as asset, liability, and equity accounts, are not closed at the end of the accounting period. These balances carry forward into the next period.