Question

Which of the following entries properly closes a temporary account?

1) Debit to Retained Earnings and Credit to Income Summary
2) Debit to Income Summary and Credit to Retained Earnings
3) Debit to Income Summary and Credit to Temporary Account
4) Debit to Temporary Account and Credit to Income Summary

Answer 1

The correct choice to close a temporary account is to debit the income summary and credit the temporary account. This shifts the balances to the income summary, which is then closed to retained earnings. Option 4 is the correct entry for this process.

Step-by-step explanation:

The subject of this question is the process of closing temporary accounts at the end of a reporting period in accounting. The correct entry to close a temporary account is to debit the income summary and credit the temporary account such as revenue or expense accounts. This process transfers the balances to the income summary account, which is then closed to the retained earnings account.

Here's a step-by-step explanation of how to close a temporary account:

1. Close all revenue accounts by debiting them and crediting income summary.
2. Close all expense accounts by crediting them and debiting income summary.
3. After closing revenue and expense accounts, the income summary account will have a balance which represents the net income or net loss for the period. To close the income summary account, if there is a net income (credit balance), debit the income summary and credit retained earnings. If there is a net loss (debit balance), credit the income summary and debit retained earnings.

Therefore, the correct choice from the options provided is option 4) Debit to Temporary Account and Credit to Income Summary. This closes the individual temporary accounts and moves the balances to the income summary.