Question

Which of the following statements regarding closing journal entries is correct?

A) Revenue accounts are debited and the income summary account is credited.

B) Expense accounts are debited and the income summary account is credited.

C)Expense accounts are credited and retained earnings account is debited.

D)Revenue accounts are debited and retained earnings account is credited.  

Please explain

Answer 1

Closing entry or closing journal entries are fiscal year end entries used to transfer balance of temporary account viz. revenue, expenses and capital withdrawal account to permanent capital account, the retained earnings. These temporary accounts can either be closed directly to retained earnings or an intermediate account is created for this purpose. Usually an intermediate account called income summary is created. Revenue and expenses are transferred to the income summary account. Then income summary is closed to retained earnings. Dividends are directly closed to retained earnings.

Balance in all the temporary accounts after closing entry should be zero to accumulate next year entries.

In order to make revenue accounts zero, revenue accounts are debited and income summary is credited.

Expense accounts are credited and income summary is debited. So the balance in expense accounts will be zero.

Hence the option “A) Revenue accounts are debited and the income summary account is credited” is correct answer.