What is the purpose of a closing entry?

• A. Increases asset accounts
• B. Transfers revenues and expenses to capital/retained earnings and resets temporary accounts
• C. Records new purchases
• D. Records credit losses

Answer: (B)

Closing entries are about prepping the books for the next period by clearing out temporary accounts and updating the owner's equity to reflect the period’s results. Revenues and expenses are temporary accounts that accumulate activity only for the current period. At period end, their balances are transferred to the capital/retained earnings account, so those temporary accounts start the new period at zero. This transfer shows whether the period produced net income or a net loss and adjusts retained earnings accordingly. Permanent accounts like assets, liabilities, and the overall equity balance carry forward and aren’t closed, which is why closing entries aren’t about recording new purchases or credit losses. In short, closing entries reset the temporary accounts and move the period’s net result into retained earnings, setting the stage for the next reporting period.