Question

When a business has a net loss rather than a net income for the period, the only step that changes in the closing process is the third step when the Income Summary Account is closed.

A. True
B. False

Answer 1

The statement regarding the closing process when a business has a net loss is false. The steps of the closing process remain the same, but the outcome of the Income Summary reveals a net loss transferred to Retained Earnings, decreasing its balance.

Step-by-step explanation:

The statement that 'when a business has a net loss rather than a net income for the period, the only step that changes in the closing process is the third step when the Income Summary Account is closed' is False. The closing process involves several steps, and the presence of a net loss does not change the steps but rather the balances that are transferred. When closing entries are made, a net loss is transferred from the Income Summary account to the Retained Earnings account (or Owner's Equity for non-corporations), just as net income would be, but instead, it decreases the balance in the Retained Earnings account due to the loss.

Businesses facing economic losses must decide whether they can continue operating at the point where price equals both marginal revenue and marginal cost or whether they should shut down and incur only their fixed costs. In the long run, persistent losses lead to a business exiting the market as part of the natural economic process.