What are closing entries?

• A. Trial Balance
• B. Closing entries
• C. Worksheet
• D. Post-closing trial balance

Answer: (B)

Closing entries are the end-of-period journal entries that reset the balances of temporary accounts to zero and transfer the period’s net result into retained earnings. Revenues and gains have credit balances, while expenses and losses have debit balances. To close them, you first move all revenue balances to an Income Summary by debiting each revenue account and crediting Income Summary. Then you move all expense balances to Income Summary by debiting Income Summary and crediting each expense account, so Income Summary reflects the net income (revenues minus expenses). Next, you close Income Summary to Retained Earnings by debiting Income Summary and crediting Retained Earnings, which updates the owners’ equity to include the period’s profit. Finally, you close any dividends or owner withdrawals by debiting Retained Earnings and crediting Dividends, reducing retained earnings by the amount paid out. After these steps, temporary accounts are zeroed, ready for the new period, and permanent accounts carry forward the updated balances.