Question

Within which of the closing entry steps is it possible to have income summary recorded as either a debit or a credit in the closing entry?

Multiple Choice

• Step 1: Transfer Revenue Account Balances

• Step 2: Transfer Expense Account Balances

• Step 3: Transfer Net Income or Net Loss to Owner’s Equity

• Step 4: Transfer the Drawing Account Balance to Capital

Answer 1

Answer : Option iii) Transfer Net Income or Net Loss to Owner's Equity.

Explanation:

Closing entries are journal entries recorded at the end of the accounting period. All the revenues and expenses accounts are transferred to income summary account.

The closing entry steps are:

• Step 1: Transfer Revenue Account Balances
• Step 2: Transfer Expense Account Balances
• Step 3: Transfer Net Income or Net Loss to Owner’s Equity
• Step 4: Transfer the Drawing Account Balance to Capital

In step 3: After closing of all revenues and expenses we transferred either Net Income or Loss to Owner's equity to close the income summary account.

If it have a either debit balance it is consider as Net income or credit balance it is consider as Net Loss.

Therefore, closing entry steps is it possible to have income summary recorded as either a debit or a credit in the closing entry is to transfer Net Income or Net loss to Owner's equity.

Thus, the option iii) is correct and remaining options are incorrect.