Question

What is the entry to close the income statement accounts with credit balances?

1) Debit each income statement account with a credit balance and credit the Income Summary account
2) Debit the Income Summary account and credit each income statement account with a debit balance
3) Debit each income statement account with a debit balance and credit the Income Summary account
4) Debit the Income Summary account and credit each income statement account with a credit balance

Answer 1

The correct entry to close income statement accounts with credit balances is to debit each account with a credit balance and credit the Income Summary account. This transfers the period's revenues and gains to the Income Summary, which eventually updates the retained earnings with net income or loss.

Step-by-step explanation:

The correct entry to close the income statement accounts with credit balances is: Debit each income statement account with a credit balance and credit the Income Summary account. This means revenues and other accounts with credit balances will be debited to reduce them to zero since they have served their purpose for the period.

At the same time, an equal amount is credited to the Income Summary account, effectively moving the balances from individual income statement accounts to this temporary account.

Subsequently, expenses and losses, which typically have debit balances, are closed by crediting them and debiting the Income Summary account, which in the end reflects the net income or loss for the period. Finally, the balance in the Income Summary account is transferred to the retained earnings which updates the equity section of the balance sheet for the net effect of the period's operations.