Question

Which of the following statements most accurately describes the purposes of the closing entries?

a)to establish zero balances in the income statement accounts and to transfer net income into retained earnings
b)to bring the balances in the revenue and expense accounts up to date and to transfer net income into retained earnings
c)to bring the balances in the asset and liability accounts up to date and to transfer net income into retained earnings
d)to establish zero balances in the balance sheet accounts and to transfer net income into retained earnings

Answer 1

The correct answer is option (a), which states that the primary purposes of closing entries are to establish zero balances in income statement accounts and to transfer net income (or loss) into retained earnings.

Step-by-step explanation:

The option that most accurately describes the purposes of the closing entries in accounting is (a) to establish zero balances in the income statement accounts and to transfer net income into retained earnings. Closing entries are an essential part of the accounting cycle used to prepare accounts for the next period. They are made at the end of an accounting period to transfer the balances of temporary accounts, which include revenues, expenses, and dividends, to the permanent equity account, retained earnings, thereby resetting the temporary accounts to zero. This prepares the income statement accounts for the next period's transactions.

Step-by-step explanation:

1. Close revenue accounts: Credit the revenue accounts and debit the income summary to reduce their balances to zero.
2. Close expense accounts: Debit the expense accounts and credit the income summary to reduce their balances to zero.
3. Close the income summary: The difference (net income or loss) in the income summary account is then transferred to retained earnings. If there is net income, debit income summary and credit retained earnings. If there's a net loss, the reverse is done.
4. Close dividends: Debit retained earnings and credit dividends to transfer the dividend payments out of retained earnings, resetting the dividend account to zero.