Closing Entries Quiz: 50 Multiple-Choice Questions

Question 1

What is the primary purpose of closing entries?

A. To correct accounting errors
B. To transfer temporary account balances to permanent accounts
C. To record adjusting entries
D. To prepare the bank reconciliation

Correct Answer: B. To transfer temporary account balances to permanent accounts

Explanation:
The primary purpose of closing entries is to reset temporary accounts to zero at the end of an accounting period and transfer their balances to permanent equity accounts. Temporary accounts include revenues, expenses, and dividends. After closing, these accounts have zero balances and are ready to accumulate transactions for the next accounting period. Permanent accounts, such as assets, liabilities, and retained earnings, are not closed because their balances carry forward to the next accounting period.

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Question 2

Which of the following accounts is a temporary account?

A. Cash
B. Accounts Payable
C. Service Revenue
D. Equipment

Correct Answer: C. Service Revenue

Explanation:
Service Revenue is a temporary account because it is used to measure revenue earned during a specific accounting period. At the end of the period, its balance is closed to Income Summary or directly to Retained Earnings, depending on the accounting system. Cash, Accounts Payable, and Equipment are permanent accounts because their balances carry forward from one accounting period to the next. Closing temporary accounts ensures that revenues and expenses for the new period start from zero.

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Question 3

Which of the following accounts is a permanent account?

A. Sales Revenue
B. Rent Expense
C. Dividends
D. Accounts Receivable

Correct Answer: D. Accounts Receivable

Explanation:
Accounts Receivable is a permanent account because it represents an asset that remains on the balance sheet until the related receivables are collected or otherwise resolved. Permanent accounts include assets, liabilities, and equity accounts such as retained earnings. Their balances are not closed at the end of the accounting period. In contrast, Sales Revenue, Rent Expense, and Dividends are temporary accounts and must be closed so that the next accounting period begins with zero balances in these accounts.

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Question 4

Which account is normally closed directly to Retained Earnings in a corporation?

A. Cash
B. Dividends
C. Equipment
D. Accounts Receivable

Correct Answer: B. Dividends

Explanation:
Dividends are temporary equity-related accounts that are closed directly to Retained Earnings. Dividends represent distributions of earnings to shareholders and therefore reduce retained earnings. Unlike revenues and expenses, dividends are not included in the calculation of net income. The closing entry transfers the debit balance of Dividends to Retained Earnings with a debit to Retained Earnings and a credit to Dividends. This ensures that the Dividends account has a zero balance at the beginning of the next period.

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Question 5

Which of the following accounts is NOT closed at the end of the accounting period?

A. Advertising Expense
B. Service Revenue
C. Retained Earnings
D. Dividends

Correct Answer: C. Retained Earnings

Explanation:
Retained Earnings is a permanent equity account, so it is not closed at the end of the accounting period. Instead, its balance is carried forward to the next period and adjusted for net income or net loss and dividends. Advertising Expense, Service Revenue, and Dividends are temporary accounts. Their balances must be closed to ensure that only the current period’s revenues, expenses, and distributions are reported when the next accounting period begins.

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Question 6

Which type of accounts are closed at the end of the accounting period?

A. Assets only
B. Liabilities only
C. Temporary accounts
D. Permanent accounts

Correct Answer: C. Temporary accounts

Explanation:
Temporary accounts are closed at the end of each accounting period. These accounts include revenues, expenses, and dividends in a corporation. Their purpose is to accumulate information for a specific accounting period. Once the period ends, their balances are transferred to an appropriate permanent equity account, usually through Income Summary. This process resets the temporary accounts to zero so they can measure the revenues, expenses, and distributions of the new accounting period independently.

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Question 7

Which account is commonly used as an intermediary during the closing process?

A. Cash
B. Income Summary
C. Accounts Receivable
D. Retained Earnings

Correct Answer: B. Income Summary

Explanation:
Income Summary is commonly used as an intermediary account during the closing process. Revenue accounts are closed into Income Summary, and expense accounts are also closed into Income Summary. The resulting balance represents either net income or net loss. Income Summary is then closed to Retained Earnings. Income Summary itself is temporary and should have a zero balance after the closing process. It does not appear on the balance sheet or post-closing trial balance.

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Question 8

Which account is closed first when using the traditional four-step closing process?

A. Expenses
B. Dividends
C. Revenues
D. Retained Earnings

Correct Answer: C. Revenues

Explanation:
Under the traditional four-step closing process, revenue accounts are closed first by debiting each revenue account and crediting Income Summary. This transfers the revenue balances into Income Summary and reduces each revenue account to zero. Expenses are then closed into Income Summary, followed by closing Income Summary to Retained Earnings. Finally, Dividends are closed to Retained Earnings. This sequence makes it easier to determine and transfer the period’s net income or net loss.

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Question 9

A company has Service Revenue of $50,000. Which closing entry is appropriate?

A. Debit Service Revenue $50,000; Credit Income Summary $50,000
B. Debit Income Summary $50,000; Credit Service Revenue $50,000
C. Debit Service Revenue $50,000; Credit Retained Earnings $50,000
D. Debit Retained Earnings $50,000; Credit Service Revenue $50,000

Correct Answer: A. Debit Service Revenue $50,000; Credit Income Summary $50,000

Explanation:
Revenue accounts normally have credit balances. To close a revenue account, the balance must be removed by recording a debit for the amount of the revenue. The corresponding credit is made to Income Summary. Therefore, Service Revenue is debited for $50,000 and Income Summary is credited for $50,000. This entry reduces Service Revenue to zero while transferring the revenue amount into Income Summary, where it will be combined with the period’s expenses.

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Question 10

A company has Rent Expense of $8,000. Which closing entry is correct?

A. Debit Rent Expense $8,000; Credit Income Summary $8,000
B. Debit Income Summary $8,000; Credit Rent Expense $8,000
C. Debit Retained Earnings $8,000; Credit Rent Expense $8,000
D. Debit Income Summary $8,000; Credit Retained Earnings $8,000

Correct Answer: B. Debit Income Summary $8,000; Credit Rent Expense $8,000

Explanation:
Expense accounts normally have debit balances. To close an expense account, the company credits the expense account for its existing balance, reducing it to zero. Income Summary is debited for the same amount because expenses reduce net income. Therefore, the correct entry is Debit Income Summary $8,000 and Credit Rent Expense $8,000. This transfers the expense from the temporary expense account to Income Summary, where it will be offset against revenues.

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Question 11

If total revenues are $80,000 and total expenses are $55,000, what is the balance of Income Summary before it is closed?

A. $25,000 debit
B. $25,000 credit
C. $55,000 credit
D. $80,000 debit

Correct Answer: B. $25,000 credit

Explanation:
When revenue accounts are closed, Income Summary receives credits totaling $80,000. When expense accounts are closed, Income Summary receives debits totaling $55,000. The difference is a $25,000 credit balance, representing net income. Because revenues exceed expenses, the company has earned a profit. This $25,000 balance is then closed from Income Summary to Retained Earnings by debiting Income Summary and crediting Retained Earnings for $25,000.

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Question 12

If total revenues are $40,000 and total expenses are $52,000, what is the result?

A. Net income of $12,000
B. Net loss of $12,000
C. Net income of $92,000
D. No net income or loss

Correct Answer: B. Net loss of $12,000

Explanation:
Net income or loss is calculated by subtracting total expenses from total revenues. Here, $40,000 of revenue minus $52,000 of expenses equals negative $12,000. Therefore, the company has a net loss of $12,000. During the closing process, Income Summary will have a $12,000 debit balance and will be closed to Retained Earnings by debiting Retained Earnings and crediting Income Summary. This reduces retained earnings because the business experienced a loss.

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Question 13

What happens to revenue accounts after closing entries are posted?

A. They have credit balances
B. They have debit balances
C. They have zero balances
D. They are transferred to assets

Correct Answer: C. They have zero balances

Explanation:
Revenue accounts are temporary accounts, so their balances are transferred to Income Summary during the closing process. Once the closing entry is posted, each revenue account has a zero balance. This allows the company to measure revenue earned during the next accounting period without including amounts from the previous period. The revenue information is ultimately incorporated into Retained Earnings through the closing of Income Summary.

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Question 14

What happens to expense accounts after closing entries?

A. They remain unchanged
B. They have zero balances
C. They become assets
D. They are transferred to Accounts Payable

Correct Answer: B. They have zero balances

Explanation:
Expense accounts are temporary accounts that accumulate costs during a specific accounting period. At period-end, their balances are transferred to Income Summary by crediting each expense account. This eliminates the existing debit balances and leaves the expense accounts with zero balances. The amounts are then included in the calculation of net income or net loss through Income Summary. As a result, the company begins the next accounting period with clean expense accounts.

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Question 15

Which account receives the balance of Income Summary when the company has net income?

A. Cash
B. Retained Earnings
C. Dividends
D. Accounts Receivable

Correct Answer: B. Retained Earnings

Explanation:
When a company has net income, the balance in Income Summary is transferred to Retained Earnings. Because net income increases shareholders’ equity, the closing entry debits Income Summary and credits Retained Earnings. For example, if net income is $20,000, the entry is Debit Income Summary $20,000 and Credit Retained Earnings $20,000. Income Summary is thereby reduced to zero, while Retained Earnings increases by the amount of net income.

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Question 16

Which entry closes Income Summary when the company has a net loss?

A. Debit Income Summary; Credit Retained Earnings
B. Debit Retained Earnings; Credit Income Summary
C. Debit Cash; Credit Income Summary
D. Debit Retained Earnings; Credit Revenue

Correct Answer: B. Debit Retained Earnings; Credit Income Summary

Explanation:
A net loss reduces Retained Earnings. When Income Summary has a debit balance because expenses exceed revenues, it must be closed by crediting Income Summary and debiting Retained Earnings. For example, with a $10,000 net loss, the entry is Debit Retained Earnings $10,000 and Credit Income Summary $10,000. This removes the Income Summary balance and decreases Retained Earnings by the amount of the loss.

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Question 17

Which of the following is a temporary account?

A. Building
B. Common Stock
C. Utilities Expense
D. Notes Payable

Correct Answer: C. Utilities Expense

Explanation:
Utilities Expense is a temporary account because it records the cost of utilities consumed during a specific accounting period. At the end of the period, its balance is closed to Income Summary. Building, Common Stock, and Notes Payable are permanent accounts because their balances carry forward into future accounting periods. Identifying temporary versus permanent accounts is essential for determining which accounts should appear in the post-closing trial balance.

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Question 18

Which accounts normally appear in a post-closing trial balance?

A. Revenues and expenses
B. Assets, liabilities, and permanent equity accounts
C. Revenues and dividends only
D. Expenses and dividends only

Correct Answer: B. Assets, liabilities, and permanent equity accounts

Explanation:
The post-closing trial balance contains only permanent accounts because all temporary accounts have been closed. These accounts generally include assets, liabilities, common stock or other permanent equity accounts, and Retained Earnings. Revenue, expense, and dividend accounts should have zero balances after closing and therefore do not appear in the post-closing trial balance. The purpose of the post-closing trial balance is to verify that the ledger remains mathematically balanced before the next accounting period begins.

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Question 19

Which account should NOT appear in the post-closing trial balance?

A. Cash
B. Accounts Payable
C. Service Revenue
D. Retained Earnings

Correct Answer: C. Service Revenue

Explanation:
Service Revenue is a temporary account and should have a zero balance after closing entries are posted. Therefore, it does not appear in the post-closing trial balance. Cash, Accounts Payable, and Retained Earnings are permanent accounts and retain their balances. The post-closing trial balance is specifically designed to contain only accounts that will continue into the next accounting period.

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Question 20

Why are closing entries necessary?

A. To increase cash
B. To reset temporary accounts for the next accounting period
C. To eliminate all liabilities
D. To calculate depreciation

Correct Answer: B. To reset temporary accounts for the next accounting period

Explanation:
Closing entries are necessary because revenues, expenses, and dividends must begin each new accounting period with zero balances. Without closing entries, the balances from previous periods would remain in these temporary accounts and would be incorrectly combined with transactions from the new period. Closing entries transfer the accumulated balances to permanent equity accounts and prepare the accounting records for the next period. They also ensure that financial statements properly reflect the activity of the current period.

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Question 21

A company earned $100,000 in revenue and incurred $70,000 in expenses. What amount should be transferred from Income Summary to Retained Earnings?

A. $30,000
B. $70,000
C. $100,000
D. $170,000

Correct Answer: A. $30,000

Explanation:
Net income equals revenues minus expenses. In this case, $100,000 − $70,000 = $30,000 of net income. After revenue and expense accounts are closed to Income Summary, Income Summary will have a $30,000 credit balance. The final closing entry transfers this balance to Retained Earnings by debiting Income Summary and crediting Retained Earnings for $30,000. Therefore, retained earnings increases by $30,000 before considering any dividends.

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Question 22

If a company has net income of $25,000 and dividends of $6,000, by how much does Retained Earnings increase?

A. $31,000
B. $25,000
C. $19,000
D. $6,000

Correct Answer: C. $19,000

Explanation:
Retained Earnings increases by net income and decreases by dividends. Therefore, the net increase is calculated as $25,000 − $6,000 = $19,000. The closing process first transfers the $25,000 net income from Income Summary to Retained Earnings. Then, the $6,000 Dividends balance is closed directly to Retained Earnings. Thus, the combined effect of the closing entries is a $19,000 increase in Retained Earnings.

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Question 23

Which account is credited when closing a revenue account?

A. Revenue account
B. Income Summary
C. Retained Earnings
D. Cash

Correct Answer: B. Income Summary

Explanation:
Revenue accounts normally carry credit balances. To close a revenue account, the company debits the revenue account and credits Income Summary. The credit to Income Summary collects the period’s revenues in one temporary account. After all revenue accounts have been closed, Income Summary reflects total revenues before expenses are closed. This approach allows the company to determine whether the period resulted in net income or net loss before transferring the final amount to Retained Earnings.

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Question 24

Which account is debited when closing an expense account?

A. The expense account
B. Income Summary
C. Retained Earnings
D. Cash

Correct Answer: B. Income Summary

Explanation:
Expense accounts normally have debit balances. To close them, the expense accounts are credited, eliminating their debit balances. Income Summary is debited for the total amount of expenses. For example, if Salaries Expense is $15,000, the closing entry includes Debit Income Summary $15,000 and Credit Salaries Expense $15,000. This transfers the expense amount into Income Summary so it can be compared with revenues to determine the company’s net income or net loss.

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Question 25

Which statement about closing entries is correct?

A. Closing entries affect only permanent accounts
B. Closing entries transfer balances from temporary accounts
C. Closing entries are recorded every day
D. Closing entries increase total assets

Correct Answer: B. Closing entries transfer balances from temporary accounts

Explanation:
Closing entries transfer the balances of temporary accounts to permanent equity accounts. They are normally prepared at the end of an accounting period after the financial statements have been prepared. Closing entries do not directly increase or decrease total assets. Instead, they reorganize balances within the equity section and reset temporary accounts to zero. Their main purpose is to prepare the accounting records for the next reporting period and properly update retained earnings.

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Question 26

A company has $60,000 of revenue and $75,000 of expenses. What balance will Income Summary have before closing it to Retained Earnings?

A. $15,000 credit
B. $15,000 debit
C. $135,000 credit
D. $75,000 debit

Correct Answer: B. $15,000 debit

Explanation:
Income Summary receives a credit of $60,000 when revenue is closed and a debit of $75,000 when expenses are closed. Therefore, the account has a net debit balance of $15,000. This represents a net loss of $15,000 because expenses exceeded revenues. To close the net loss, the company debits Retained Earnings and credits Income Summary for $15,000. This reduces Retained Earnings and leaves Income Summary with a zero balance.

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Question 27

Which account is closed directly to Retained Earnings rather than Income Summary?

A. Sales Revenue
B. Salaries Expense
C. Dividends
D. Insurance Expense

Correct Answer: C. Dividends

Explanation:
Dividends are closed directly to Retained Earnings because they represent distributions of equity rather than an expense incurred to generate revenue. Revenue and expense accounts are first transferred to Income Summary, which determines net income or net loss. Dividends do not affect net income. Instead, they directly reduce retained earnings. Therefore, the closing entry for dividends is Debit Retained Earnings and Credit Dividends for the amount of the dividend balance.

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Question 28

What is the normal balance of the Income Summary account before closing?

A. It is always a debit balance
B. It is always a credit balance
C. It can be either a debit or credit balance
D. It always has a zero balance

Correct Answer: C. It can be either a debit or credit balance

Explanation:
Income Summary can have either a debit or credit balance before it is closed. If revenues exceed expenses, Income Summary has a credit balance representing net income. If expenses exceed revenues, it has a debit balance representing a net loss. After the balance is transferred to Retained Earnings, Income Summary should have a zero balance. Therefore, its balance depends on whether the company earned a profit or experienced a loss during the period.

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Question 29

Which account normally has a debit balance before closing?

A. Sales Revenue
B. Service Revenue
C. Salaries Expense
D. Retained Earnings

Correct Answer: C. Salaries Expense

Explanation:
Salaries Expense normally has a debit balance because expenses increase with debits under the double-entry accounting system. To close the account, the company credits Salaries Expense for its existing balance and debits Income Summary. Revenue accounts normally have credit balances, while Retained Earnings normally has a credit balance when positive. Understanding normal balances helps accountants determine the correct debit and credit needed to eliminate temporary account balances during the closing process.

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Question 30

What is the effect of closing a revenue account?

A. It increases the revenue account
B. It reduces the revenue account to zero
C. It increases an asset account
D. It reduces Retained Earnings

Correct Answer: B. It reduces the revenue account to zero

Explanation:
Closing a revenue account removes its accumulated balance by debiting the revenue account for the amount of its credit balance. The corresponding credit is made to Income Summary. As a result, the revenue account’s balance becomes zero. This does not mean the revenue disappeared economically; rather, the amount has been transferred into the closing process and ultimately becomes part of Retained Earnings through net income or loss.

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Question 31

What is the effect of closing an expense account?

A. It increases the expense balance
B. It reduces the expense account to zero
C. It increases total liabilities
D. It increases revenue

Correct Answer: B. It reduces the expense account to zero

Explanation:
Closing an expense account eliminates its debit balance by recording a credit equal to the account’s balance. The corresponding debit is recorded in Income Summary. This process resets the expense account to zero and transfers the expense information into Income Summary. Closing the expense accounts is necessary because expenses relate only to the accounting period in which they were incurred. The new accounting period must begin with zero balances in all temporary expense accounts.

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Question 32

Which financial statement is prepared before closing entries are recorded?

A. Post-closing trial balance
B. Income statement
C. Opening balance sheet
D. Bank reconciliation

Correct Answer: B. Income statement

Explanation:
The income statement is normally prepared before closing entries because it reports revenues, expenses, and net income or net loss for the accounting period. The information from the income statement is then used in the closing process to transfer temporary account balances into Retained Earnings. A post-closing trial balance, by contrast, is prepared after closing entries have been posted. Closing entries should therefore follow the preparation of the financial statements that require temporary account balances.

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Question 33

A company has Sales Revenue of $90,000 and Sales Returns and Allowances of $4,000. Which amount represents the net effect of these two temporary accounts before considering other revenues and expenses?

A. $94,000
B. $90,000
C. $86,000
D. $4,000

Correct Answer: C. $86,000

Explanation:
Sales Returns and Allowances reduce sales revenue. Therefore, the net sales amount is calculated as $90,000 − $4,000 = $86,000. Both Sales Revenue and Sales Returns and Allowances are temporary accounts and will be closed at the end of the accounting period. The exact closing entries depend on the account balances, but the overall effect is that these temporary revenue-related accounts contribute a net $86,000 to the period’s revenues before other revenues and expenses are considered.

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Question 34

Which account would remain in the ledger after all closing entries are completed?

A. Salaries Expense
B. Sales Revenue
C. Dividends
D. Equipment

Correct Answer: D. Equipment

Explanation:
Equipment is a permanent asset account, so its balance remains in the ledger after closing entries are completed. Salaries Expense, Sales Revenue, and Dividends are temporary accounts and should have zero balances after the closing process. Permanent accounts continue into the next accounting period because their balances represent ongoing financial positions rather than activity limited to a single period. Equipment will therefore appear in the post-closing trial balance.

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Question 35

Which account is increased by the closing of net income?

A. Retained Earnings
B. Dividends
C. Expenses
D. Accounts Payable

Correct Answer: A. Retained Earnings

Explanation:
Net income increases shareholders’ equity, and the equity account affected by the closing of net income is Retained Earnings. When Income Summary has a credit balance representing net income, the company debits Income Summary and credits Retained Earnings. The credit increases Retained Earnings. This reflects the fact that the company generated earnings during the period that were retained in the business. Dividends may subsequently reduce Retained Earnings.

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Question 36

Which account is decreased when dividends are closed?

A. Cash
B. Revenue
C. Retained Earnings
D. Accounts Payable

Correct Answer: C. Retained Earnings

Explanation:
Dividends represent distributions of earnings to shareholders and therefore decrease Retained Earnings. When closing Dividends, the company debits Retained Earnings and credits Dividends. This eliminates the temporary Dividends balance and records its effect on permanent equity. Although dividends may involve a reduction in cash when they are paid, the closing entry itself focuses on transferring the Dividends balance to Retained Earnings. Dividends are not treated as an expense and do not affect net income.

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Question 37

A company reports net income of $40,000 and dividends of $10,000. If beginning Retained Earnings is $70,000, what is ending Retained Earnings?

A. $80,000
B. $100,000
C. $110,000
D. $120,000

Correct Answer: C. $100,000

Explanation:
Ending Retained Earnings is calculated as Beginning Retained Earnings + Net Income − Dividends. Therefore, $70,000 + $40,000 − $10,000 = $100,000. The closing entries accomplish the same effect by transferring the $40,000 net income into Retained Earnings and then closing the $10,000 Dividends account against Retained Earnings. Thus, the ending balance of Retained Earnings after closing is $100,000.

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Question 38

If a company has no revenues but has $5,000 of expenses, what happens to Retained Earnings during closing?

A. It increases by $5,000
B. It decreases by $5,000
C. It remains unchanged
D. It increases by $10,000

Correct Answer: B. It decreases by $5,000

Explanation:
If a company has no revenue and incurs $5,000 of expenses, it has a net loss of $5,000. The loss decreases Retained Earnings. During closing, Income Summary will have a $5,000 debit balance and will be closed by debiting Retained Earnings and crediting Income Summary. As a result, Retained Earnings decreases by $5,000. This reflects the economic effect of the company’s expenses exceeding its revenues during the accounting period.

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Question 39

Which of the following is NOT a reason for preparing closing entries?

A. Reset temporary accounts
B. Update Retained Earnings
C. Prepare accounts for the next period
D. Adjust the balance of Cash to its fair value

Correct Answer: D. Adjust the balance of Cash to its fair value

Explanation:
Closing entries do not adjust Cash to fair value or perform valuation adjustments. Their purpose is to reset temporary accounts and transfer the effects of revenues, expenses, and dividends to Retained Earnings. Cash is a permanent asset account and is not closed. Adjustments to asset balances, when required, are generally handled through adjusting entries or other appropriate accounting procedures, not through the closing process.

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Question 40

What should the balance of Income Summary be after all closing entries are completed?

A. Equal to net income
B. Equal to net loss
C. Zero
D. Equal to total revenue

Correct Answer: C. Zero

Explanation:
Income Summary is a temporary account used only during the closing process. After revenues and expenses have been transferred into it, its balance represents net income or net loss. That balance is then transferred to Retained Earnings. Once this final closing entry is posted, Income Summary should have a zero balance. Because it is temporary, it should not carry any balance into the next accounting period or appear in the post-closing trial balance.

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Question 41

Which account would be closed with a credit?

A. Service Revenue
B. Rent Expense
C. Dividends
D. Salaries Expense

Correct Answer: C. Dividends

Explanation:
Dividends normally have a debit balance because they represent a reduction of shareholders’ equity. To close the Dividends account, the company credits Dividends and debits Retained Earnings. Service Revenue is also closed with a debit because revenue normally has a credit balance. Rent Expense and Salaries Expense are normally closed with credits as well because expenses have debit balances. Therefore, Dividends is the only option that specifically fits the requested closing-credit account, although expense accounts are also credited during closing.

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Question 42

Which account would be closed with a debit?

A. Sales Revenue
B. Service Revenue
C. Interest Revenue
D. Dividends

Correct Answer: A. Sales Revenue

Explanation:
Sales Revenue normally has a credit balance. To close it, the company debits Sales Revenue for its full balance and credits Income Summary. The same principle applies to other revenue accounts, including Service Revenue and Interest Revenue. Dividends normally have a debit balance and therefore are closed with a credit to Dividends. The key principle is that closing an account requires an entry opposite to its normal balance so that the account becomes zero.

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Question 43

If total revenues equal total expenses, what happens to Income Summary?

A. It has a debit balance
B. It has a credit balance
C. It has a zero balance
D. It becomes an asset

Correct Answer: C. It has a zero balance

Explanation:
When total revenues equal total expenses, the company has neither net income nor net loss. Revenue accounts closed into Income Summary create credits, while expense accounts create equal debits. These amounts offset each other, leaving Income Summary with a zero balance. In such a situation, no net income or net loss needs to be transferred from Income Summary to Retained Earnings. However, any Dividends account would still be closed separately to Retained Earnings.

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Question 44

Which of the following accounts is included in calculating net income?

A. Dividends
B. Common Stock
C. Service Revenue
D. Retained Earnings

Correct Answer: C. Service Revenue

Explanation:
Service Revenue is included in the calculation of net income because net income is determined by subtracting expenses from revenues. Dividends, Common Stock, and Retained Earnings are equity-related accounts and are not components of the income statement’s net income calculation. Dividends reduce Retained Earnings but do not represent an expense. Common Stock represents contributed capital, while Retained Earnings accumulates undistributed earnings from current and previous periods.

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Question 45

Which account does NOT affect net income?

A. Salaries Expense
B. Service Revenue
C. Rent Expense
D. Dividends

Correct Answer: D. Dividends

Explanation:
Dividends do not affect net income because they are distributions of earnings to shareholders rather than expenses incurred in operating the business. Net income is calculated using revenues and expenses. Dividends are accounted for separately and directly reduce Retained Earnings. During closing, revenue and expense accounts are transferred through Income Summary, while Dividends are closed directly to Retained Earnings. This distinction is important when preparing financial statements and analyzing changes in shareholders’ equity.

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Question 46

A company has Revenue of $120,000, Expenses of $90,000, and Dividends of $15,000. What is the total increase in Retained Earnings from these transactions?

A. $15,000
B. $30,000
C. $45,000
D. $105,000

Correct Answer: A. $15,000

Explanation:
First calculate net income: $120,000 − $90,000 = $30,000. Dividends then reduce Retained Earnings by $15,000. Therefore, the net increase in Retained Earnings is $30,000 − $15,000 = $15,000. The closing process transfers net income from Income Summary to Retained Earnings and then closes Dividends directly to Retained Earnings. This illustrates why dividends affect retained earnings but do not affect the calculation of net income.

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Question 47

Which statement about closing entries is true?

A. They are usually prepared before adjusting entries
B. They are usually prepared after financial statements
C. They are prepared before recording daily transactions
D. They only affect asset accounts

Correct Answer: B. They are usually prepared after financial statements

Explanation:
Closing entries are generally prepared after adjusting entries have been recorded and financial statements have been prepared. The financial statements require the final adjusted balances of revenue and expense accounts. Once the statements are completed, the temporary accounts can be closed and their balances transferred to Retained Earnings. Closing entries therefore occur near the end of the accounting cycle. They do not affect only assets; instead, they primarily involve temporary revenue, expense, dividend, and equity accounts.

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Question 48

What is the main purpose of a post-closing trial balance?

A. To calculate gross profit
B. To verify that the ledger remains balanced after closing
C. To calculate depreciation
D. To record new transactions

Correct Answer: B. To verify that the ledger remains balanced after closing

Explanation:
The post-closing trial balance is prepared after all closing entries have been posted. Its primary purpose is to verify that total debits equal total credits in the ledger after the closing process. It also confirms that temporary accounts have been reduced to zero and that only permanent accounts remain. The post-closing trial balance serves as the starting point for the next accounting period and helps identify mathematical errors in the closing process.

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Question 49

A company forgets to close its Dividends account. What is the likely result?

A. Retained Earnings will be overstated
B. Retained Earnings will be understated
C. Revenue will be overstated
D. Assets will automatically increase

Correct Answer: A. Retained Earnings will be overstated

Explanation:
If the Dividends account is not closed, its balance will not be transferred to Retained Earnings. Because dividends reduce Retained Earnings, failing to record the closing entry means Retained Earnings will not reflect the reduction caused by the dividends. Consequently, Retained Earnings will be overstated by the amount of the unclosed Dividends balance. The Dividends account will also incorrectly retain a balance instead of being reset to zero, creating an inaccurate post-closing ledger.

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Question 50

Which sequence best represents the traditional closing process?

A. Expenses → Revenues → Dividends → Income Summary
B. Revenues → Expenses → Income Summary → Dividends
C. Dividends → Revenues → Assets → Expenses
D. Assets → Liabilities → Revenues → Dividends

Correct Answer: B. Revenues → Expenses → Income Summary → Dividends

Explanation:
The traditional four-step closing process begins by closing revenue accounts to Income Summary. Next, all expense accounts are closed to Income Summary. The resulting balance in Income Summary represents net income or net loss and is then transferred to Retained Earnings. Finally, the Dividends account is closed directly to Retained Earnings. This sequence resets all temporary accounts to zero and updates Retained Earnings so the accounting records are ready for the next accounting period.

 

Closing Entries Quiz: Test Your Financial Accounting Knowledge

Question 1

Which of the following types of accounts are closed at the end of an accounting period?

• A) Permanent accounts

• B) Temporary accounts

• C) Real accounts

• D) Asset and liability accounts

Correct Answer: B) Temporary accounts

Explanation: Closing entries are performed only for temporary (nominal) accounts, which include revenues, expenses, and dividends or withdrawals. These accounts gather financial activity for a single accounting period. At the end of the period, their balances must be reduced to zero so that the next period begins with a fresh start, preventing the mixing of financial performance across different timeframes. In contrast, permanent (real) accounts—such as assets, liabilities, and equity—carry their ending balances forward into the subsequent period.

Question 2

What is the primary purpose of making closing entries?

• A) To correct errors made during the accounting cycle

• B) To adjust account balances to fair market value

• C) To reduce temporary account balances to zero and update retained earnings

• D) To prepare the trial balance prior to posting transactions

Correct Answer: C) To reduce temporary account balances to zero and update retained earnings

Explanation: The main objective of closing entries is twofold: resetting all temporary account balances (revenues, expenses, and dividends) to zero and transferring their net impact into Retained Earnings (or Owner’s Capital). Zeroing out temporary accounts ensures that income statement items track performance exclusively for the current period. Simultaneously, updating the Retained Earnings account ensures that the balance sheet reflects the accumulated undistributed profits of the business at the end of the accounting cycle.

Question 3

Which of the following accounts is classified as a permanent (real) account?

• A) Service Revenue

• B) Rent Expense

• C) Retained Earnings

• D) Dividends

Correct Answer: C) Retained Earnings

Explanation: Retained Earnings is a permanent equity account that appears on the balance sheet. Permanent accounts accumulate cumulative financial results from the inception of the business and are never closed at the end of an accounting period. Their ending balances become the beginning balances for the next period. Service Revenue, Rent Expense, and Dividends are all temporary accounts; revenue and expense accounts belong to the income statement, while dividends represent periodic profit distributions, all of which are zeroed out during the closing process.

Question 4

What type of balance do revenue accounts typically hold before closing entries are posted?

• A) Debit balance

• B) Credit balance

• C) Zero balance

• D) Variable balance depending on cash flow

Correct Answer: B) Credit balance

Explanation: Revenues increase total equity, and according to double-entry accounting rules, equity increases are recorded as credits. Therefore, revenue accounts normally carry a credit balance throughout the accounting period. During the closing process, to reduce a revenue account’s balance to zero, the account must be debited for an amount equal to its credit balance. The offset is typically credited to the Income Summary account, effectively transferring total revenues for the period into the summary account.

Question 5

Which entry correctly closes the Service Revenue account with a balance of $15,000?

• A) Debit Income Summary $15,000; Credit Service Revenue $15,000

• B) Debit Service Revenue $15,000; Credit Income Summary $15,000

• C) Debit Service Revenue $15,000; Credit Retained Earnings $15,000

• D) Debit Retained Earnings $15,000; Credit Service Revenue $15,000

Correct Answer: B) Debit Service Revenue $15,000; Credit Income Summary $15,000

Explanation: Because revenue accounts normally carry a credit balance, closing them requires a debit equal to their full ending balance to bring the net account balance to zero. The corresponding credit is made to the Income Summary account. Choice B properly illustrates this fundamental mechanics. Crediting Income Summary aggregates all revenues for the period prior to determining net income. Directly closing revenue to Retained Earnings (Choice C) is sometimes used in shortcut entries, but standard four-step closing procedures mandate using Income Summary first.

Question 6

How are expense accounts closed at the end of an accounting period?

• A) By debiting Expense accounts and crediting Income Summary

• B) By debiting Income Summary and crediting Expense accounts

• C) By debiting Retained Earnings and crediting Expense accounts

• D) By crediting Expense accounts and debiting Cash

Correct Answer: B) By debiting Income Summary and crediting Expense accounts

Explanation: Expense accounts normally carry debit balances because they represent decreases in equity. To close an expense account and reduce its balance to zero, it must be credited for the total amount of its ending balance. The combined total of all individual expense credits is matched with a single debit to the Income Summary account. This entry transfers all incurred costs for the period into the Income Summary account, where they are offset against total revenues to compute net income or loss.

Question 7

What is the Income Summary account used for?

• A) To report net income directly on the balance sheet

• B) As a temporary clearing account during the closing process

• C) To track daily operating expenses

• D) As a permanent equity account

Correct Answer: B) As a temporary clearing account during the closing process

Explanation: The Income Summary account is a specialized temporary clearing account utilized exclusively during the closing process. It does not appear on any financial statement because its balance is opened and closed within the span of making closing entries. Its purpose is to aggregate total revenues (credited) and total expenses (debited) to determine the net income or net loss for the period. Once net income or loss is calculated, the balance in Income Summary is subsequently closed into Retained Earnings.

Question 8

If a company has a net income of $8,000, what will be the balance in the Income Summary account before it is closed?

• A) $8,000 Debit balance

• B) $8,000 Credit balance

• C) $0 balance

• D) $16,000 Credit balance

Correct Answer: B) $8,000 Credit balance

Explanation: When revenues exceed expenses, the business earns a net income. In the Income Summary account, total revenues are credited and total expenses are debited. If total revenues exceed total expenses by $8,000, the credits exceed the debits, leaving an $8,000 credit balance in the Income Summary account. A credit balance in Income Summary indicates net profitability for the period, whereas a debit balance would represent a net loss. This remaining credit balance must then be debited to close Income Summary.

Question 9

Which entry is required to close the Income Summary account when the company generates a Net Income of $10,000?

• A) Debit Retained Earnings $10,000; Credit Income Summary $10,000

• B) Debit Income Summary $10,000; Credit Retained Earnings $10,000

• C) Debit Income Summary $10,000; Credit Dividends $10,000

• D) Debit Cash $10,000; Credit Income Summary $10,000

Correct Answer: B) Debit Income Summary $10,000; Credit Retained Earnings $10,000

Explanation: Net income results in a credit balance in the Income Summary account because revenues exceeded expenses. To close the Income Summary account, it must be debited for $10,000, reducing its balance to zero. The offsetting credit of $10,000 is made to Retained Earnings. Crediting Retained Earnings reflects the increase in accumulated stockholder equity due to profitable operations during the period. This step officially updates the Retained Earnings account on the balance sheet with the net profit earned.

Question 10

If a company incurs a Net Loss of $4,000, how is the Income Summary account closed?

• A) Debit Income Summary $4,000; Credit Retained Earnings $4,000

• B) Debit Retained Earnings $4,000; Credit Income Summary $4,000

• C) Debit Income Summary $4,000; Credit Dividends $4,000

• D) Debit Dividends $4,000; Credit Retained Earnings $4,000

Correct Answer: B) Debit Retained Earnings $4,000; Credit Income Summary $4,000

Explanation: When expenses exceed revenues, the result is a net loss, leaving a debit balance in the Income Summary account. To close Income Summary, a credit entry of $4,000 is required to bring its balance to zero. The offsetting debit is applied to Retained Earnings. Debiting Retained Earnings reduces stockholders’ equity, reflecting the economic loss sustained by the business during the period. This ensures that the equity section of the balance sheet correctly reflects the reduction in retained profit.

Question 11

How is the Dividends (or Owner’s Drawing) account closed?

• A) By debiting Income Summary and crediting Dividends

• B) By debiting Dividends and crediting Retained Earnings

• C) By debiting Retained Earnings and crediting Dividends

• D) By debiting Dividends and crediting Income Summary

Correct Answer: C) By debiting Retained Earnings and crediting Dividends

Explanation: The Dividends account is a temporary account that tracks distributions of assets to shareholders. Because dividends reduce equity without affecting net income, they are not an expense and are never closed to the Income Summary account. Dividends normally carry a debit balance. To close the Dividends account, it is credited for its full balance and Retained Earnings (or Owner’s Capital) is debited. This directly reduces stockholders’ equity on the balance sheet and resets the Dividends account balance to zero.

Question 12

Which of the following describes the correct order of the standard 4-step closing process?

• A) Expenses → Revenues → Income Summary → Dividends

• B) Revenues → Expenses → Income Summary → Dividends

• C) Income Summary → Revenues → Expenses → Dividends

• D) Dividends → Expenses → Revenues → Income Summary

Correct Answer: B) Revenues → Expenses → Income Summary → Dividends

Explanation: The standard formal closing process follows four logical steps: First, close all revenue accounts to Income Summary (debit revenues, credit Income Summary). Second, close all expense accounts to Income Summary (debit Income Summary, credit expenses). Third, close the Income Summary account balance to Retained Earnings (transferring net income or loss). Fourth, close the Dividends account directly to Retained Earnings (debit Retained Earnings, credit Dividends). Following this sequence ensures that income is computed before profits are distributed in retained earnings records.

Question 13

Which financial statement is directly prepared after closing entries are posted?

• A) Income Statement

• B) Statement of Cash Flows

• C) Post-Closing Trial Balance

• D) Adjusted Trial Balance

Correct Answer: C) Post-Closing Trial Balance

Explanation: After closing entries are recorded in the general journal and posted to the general ledger, accountants prepare a Post-Closing Trial Balance. This schedule lists all open accounts and their balances. Because all temporary accounts (revenues, expenses, dividends) have been closed to zero, the post-closing trial balance contains exclusively permanent (balance sheet) accounts: assets, liabilities, and equity. Its main purpose is to prove the equality of total debits and total credits before entering the next accounting period.

Question 14

Which of the following accounts will appear on the Post-Closing Trial Balance?

• A) Sales Revenue

• B) Salaries Expense

• C) Accumulated Depreciation

• D) Dividends

Correct Answer: C) Accumulated Depreciation

Explanation: Accumulated Depreciation is a permanent account—specifically a contra-asset account—and remains on the general ledger across accounting periods. Therefore, it appears on the post-closing trial balance. Sales Revenue, Salaries Expense, and Dividends are all temporary accounts that were zeroed out during the closing entry procedures. The post-closing trial balance verifies that debit and credit totals match among permanent accounts only, ensuring the general ledger is structurally balanced and ready for the next period’s operational transactions.

Question 15

What happens if an accountant forgets to close the Revenue accounts at year-end?

• A) Assets will be understated on the balance sheet.

• B) Net income for the following period will be overstated.

• C) Liabilities will be overstated.

• D) Retained earnings will be overstated.

Correct Answer: B) Net income for the following period will be overstated.

Explanation: If revenue accounts are not closed, their accumulated balances carry over into the next accounting period. As a result, revenues earned in the previous period would be added to the new period’s revenues, leading to an overstatement of total revenue and net income for the subsequent period. Closing entries are essential to isolate revenues and expenses strictly to their respective accounting periods, upholding the matching principle and periodicity concept required by standard accounting principles.

Question 16

Which accounting principle primarily dictates that temporary account balances should not carry over into future periods?

• A) Going Concern Concept

• B) Periodicity Concept

• C) Cost Principle

• D) Monetary Unit Assumption

Correct Answer: B) Periodicity Concept

Explanation: The Periodicity Concept (or Time Period Assumption) dictates that a company’s economic activities can be divided into distinct, artificial time intervals, such as months, quarters, or years. To evaluate financial performance accurately for a specific time period, revenues and expenses must be isolated within that frame. Closing entries enforce periodicity by resetting temporary performance-tracking accounts to zero at the end of each period, ensuring old financial activity does not contaminate subsequent financial reporting.

Question 17

Before posting closing entries, an accountant must first complete which step of the accounting cycle?

• A) Prepare the post-closing trial balance

• B) Prepare financial statements

• C) Post reversing entries

• D) Close permanent accounts

Correct Answer: B) Prepare financial statements

Explanation: In the accounting cycle, financial statements (Income Statement, Statement of Retained Earnings, and Balance Sheet) are prepared using the adjusted trial balance before closing entries are journalized and posted. Closing temporary accounts prematurely would reset revenue and expense balances to zero, making it impossible to pull performance data from the general ledger to construct the Income Statement. Closing entries represent the final accounting steps prior to running the post-closing trial balance.

Question 18

The entry to close Sales Revenues of $50,000 and Gain on Sale of Equipment of $5,000 includes a:

• A) Credit to Income Summary for $55,000

• B) Debit to Income Summary for $55,000

• C) Credit to Sales Revenue for $50,000

• D) Debit to Retained Earnings for $55,000

Correct Answer: A) Credit to Income Summary for $55,000

Explanation: Both Sales Revenue ($50,000) and Gain on Sale of Equipment ($5,000) have normal credit balances. To close both accounts simultaneously in a compound entry, Sales Revenue is debited for $50,000 and Gain on Sale of Equipment is debited for $5,000, bringing both balances to zero. The corresponding total of $55,000 is credited to the Income Summary account. This aggregates all revenue and gain items into Income Summary in a single closing step.

Question 19

A company has total revenues of $80,000, total expenses of $65,000, and dividends of $5,000. What is the net change in Retained Earnings after all closing entries are posted?

• A) Increase of $15,000

• B) Increase of $10,000

• C) Increase of $80,000

• D) Decrease of $5,000

Correct Answer: B) Increase of $10,000

Explanation: Net Income is calculated as Revenues ($80,000) minus Expenses ($65,000), yielding $15,000. When closing entries are posted, Income Summary credits Retained Earnings for the $15,000 net income. However, closing the Dividends account requires a $5,000 debit to Retained Earnings. Therefore, the net overall change in Retained Earnings is a $10,000 increase ($15,000 Net Income − $5,000 Dividends). This net figure reflects the profit retained in the business after distribution.

Question 20

Where are closing entries initially recorded in the accounting system?

• A) General Ledger

• B) General Journal

• C) Financial Statements

• D) Worksheets only

Correct Answer: B) General Journal

Explanation: Like all accounting adjustments and daily transactions, closing entries must first be recorded chronologically in the General Journal. Journalizing ensures an auditable, permanent historical record of the closing transactions. Once recorded in the general journal, the entries are posted to the individual accounts in the General Ledger to update account balances, bringing temporary accounts to zero and updating the permanent Retained Earnings balance.

Question 21

Which of the following accounts will have a zero balance on the Post-Closing Trial Balance?

• A) Unearned Revenue

• B) Prepaid Insurance

• C) Depreciation Expense

• D) Accounts Payable

Correct Answer: C) Depreciation Expense

Explanation: Depreciation Expense is an income statement account and thus a temporary account. During the closing process, all expense accounts are credited to bring their balances to zero. Consequently, Depreciation Expense will show a zero balance on the post-closing trial balance. Unearned Revenue (liability), Prepaid Insurance (asset), and Accounts Payable (liability) are permanent balance sheet accounts; their balances are carried forward into the next period and will appear on the post-closing trial balance.

Question 22

A credit balance in the Income Summary account after revenues and expenses are closed indicates:

• A) A net loss

• B) A net income

• C) An error in closing entries

• D) Dividends exceeded net income

Correct Answer: B) A net income

Explanation: Revenues are credited to Income Summary, while expenses are debited to Income Summary. If total credits exceed total debits in the Income Summary account, it means revenues generated were greater than expenses incurred. This net excess credit represents Net Income. When closing Income Summary to Retained Earnings, this credit balance will be debited out of Income Summary and credited into Retained Earnings, increasing stockholders’ equity.

Question 23

A sole proprietorship closes its Income Summary account directly into which account?

• A) Retained Earnings

• B) Owner’s Capital

• C) Owner’s Drawings

• D) Common Stock

Correct Answer: B) Owner’s Capital

Explanation: In a sole proprietorship, profits do not flow into a Retained Earnings account because the business structure does not issue stock. Instead, net income or loss from the Income Summary account is closed directly into the Owner’s Capital account. Similarly, the Owner’s Drawing account (equivalent to dividends in a corporation) is closed to Owner’s Capital. Corporations use Retained Earnings, whereas sole proprietorships centralize equity updates within the Owner’s Capital account.

Question 24

What is the effect on the accounting equation when closing entries are posted?

• A) Assets increase, Equity decreases

• B) Total Assets and Total Liabilities change

• C) Total Equity remains unchanged, but its internal composition updates

• D) Liabilities decrease, Assets increase

Correct Answer: C) Total Equity remains unchanged, but its internal composition updates

Explanation: Posting closing entries does not alter the total value of owner’s equity or affect total assets and liabilities. Instead, it reclassifies equity components internally. Temporary equity items (revenues, expenses, dividends) are consolidated and shifted into permanent equity (Retained Earnings or Capital). The economic transactions already occurred during the accounting period; closing entries merely reformat general ledger balances to finalize equity reporting and reset operational counters for the upcoming period.

Question 25

Which of the following statement is true regarding the Income Summary account?

• A) It appears on the Income Statement as a line item.

• B) It carries a balance into the next accounting year.

• C) It is opened and closed during the end-of-period closing process.

• D) It replaces the Retained Earnings account.

Correct Answer: C) It is opened and closed during the end-of-period closing process.

Explanation: The Income Summary account is a temporary holding account created strictly for use during the end-of-period closing process. It does not exist prior to closing entries and ends with a zero balance once closing is complete. Because it starts and ends at zero within the closing routine, it never appears on financial statements like the Income Statement or Balance Sheet, nor does it carry a balance into future accounting periods.

Question 26

If total revenues are $120,000 and total expenses are $135,000, closing Income Summary requires:

• A) Debit Retained Earnings $15,000; Credit Income Summary $15,000

• B) Debit Income Summary $15,000; Credit Retained Earnings $15,000

• C) Debit Cash $15,000; Credit Income Summary $15,000

• D) Debit Income Summary $15,000; Credit Expenses $15,000

Correct Answer: A) Debit Retained Earnings $15,000; Credit Income Summary $15,000

Explanation: When total expenses ($135,000) exceed total revenues ($120,000), the company incurs a net loss of $15,000. This results in a debit balance of $15,000 in the Income Summary account. To close Income Summary, it must be credited for $15,000, bringing its balance to zero. The offsetting debit is made to Retained Earnings for $15,000, which reflects the reduction in stockholders’ equity due to the loss sustained during the period.

Question 27

Which of the following accounts is NOT closed at the end of the year?

• A) Interest Expense

• B) Unearned Service Revenue

• C) Cost of Goods Sold

• D) Sales Discounts

Correct Answer: B) Unearned Service Revenue

Explanation: Unearned Service Revenue represents cash received in advance for services not yet performed. It is classified as a liability account on the balance sheet because the company owes a performance obligation. As a liability, it is a permanent account and is not closed at year-end. Conversely, Interest Expense, Cost of Goods Sold (an expense), and Sales Discounts (a contra-revenue account) are temporary accounts that must be closed to zero.

Question 28

The entry to close Rent Expense, Utilities Expense, and Salaries Expense will involve:

• A) Debits to each individual expense account and a credit to Income Summary

• B) Credits to each individual expense account and a debit to Income Summary

• C) Debits to Cash and credits to expense accounts

• D) Credits to Retained Earnings and debits to expense accounts

Correct Answer: B) Credits to each individual expense account and a debit to Income Summary

Explanation: Expense accounts naturally carry debit balances. To close multiple expense accounts in a single compound closing entry, each individual expense account is credited for its ending balance. The sum of these individual credits is debited as a single total to the Income Summary account. This resets each expense account balance to zero while aggregating total period expenses on the debit side of the Income Summary account.

Question 29

Why are dividends closed directly to Retained Earnings rather than Income Summary?

• A) Dividends are considered operating expenses.

• B) Dividends represent a distribution of profit, not an expense of generating revenue.

• C) Income Summary only accepts credit entries.

• D) Dividends are permanent balance sheet accounts.

Correct Answer: B) Dividends represent a distribution of profit, not an expense of generating revenue.

Explanation: Dividends are payments made to owners as a return on their capital investment. They do not qualify as operating expenses because they do not help generate revenue. Because net income measures operating performance (Revenues minus Expenses), dividends are excluded from Income Summary. Instead, dividends are closed directly to Retained Earnings, accurately reflecting a direct reduction in cumulative earnings without distorting the period’s net income calculation.

Question 30

The Post-Closing Trial Balance proves:

• A) That all transactions were recorded correctly without error.

• B) The equality of total debits and credits for permanent accounts after closing entries.

• C) That net income was calculated accurately on the income statement.

• D) That all temporary accounts retain proper non-zero balances.

Correct Answer: B) The equality of total debits and credits for permanent accounts after closing entries.

Explanation: The primary purpose of the Post-Closing Trial Balance is to verify that total debits equal total credits for all remaining open (permanent) accounts after closing entries have been posted. While it proves mathematical equality in the general ledger, it cannot guarantee that transactions were free from error (such as omitted entries or wrong account classifications). It confirms that temporary accounts are zeroed out and permanent balances are balanced.

Question 31

In a alternative two-step closing approach, temporary accounts are closed:

• A) Directly to Cash

• B) Directly to Retained Earnings, bypassing Income Summary

• C) Directly to Asset accounts

• D) Directly to Accounts Receivable

Correct Answer: B) Directly to Retained Earnings, bypassing Income Summary

Explanation: While the traditional four-step closing procedure uses the Income Summary account as an intermediate clearing step, some modern computerized systems or simplified accounting practices use a two-step approach. In this streamlined method, revenues and expenses are closed directly to Retained Earnings alongside dividends, bypassing Income Summary entirely. Both methods achieve the identical final result: zeroing temporary accounts and updating Retained Earnings correctly.

Question 32

What is the normal balance of the Income Summary account before closing it, if revenues are $45,000 and expenses are $30,000?

• A) $15,000 Debit

• B) $15,000 Credit

• C) $75,000 Credit

• D) $0

Correct Answer: B) $15,000 Credit

Explanation: Revenues ($45,000) are credited to Income Summary, and expenses ($30,000) are debited to Income Summary. Subtracting $30,000 of debits from $45,000 of credits leaves a net credit balance of $15,000 in the Income Summary account. This $15,000 credit balance represents net income. To complete the closing sequence, Income Summary will subsequently be debited for $15,000 and Retained Earnings credited for $15,000.

Question 33

An error occurs during closing: Salaries Expense of $2,000 was debited instead of credited during closing. What is the impact on the Salaries Expense balance?

• A) It is correctly zeroed out.

• B) It now has a debit balance of $4,000 instead of zero.

• C) It has a credit balance of $2,000.

• D) It has no effect on the ledger.

Correct Answer: B) It now has a debit balance of $4,000 instead of zero.

Explanation: Salaries Expense naturally has a $2,000 debit balance. To close it, a $2,000 credit is required ($2,000 Debit − $2,000 Credit = $0). If an accountant mistakenly debits Salaries Expense for $2,000 again, the account balance becomes a $4,000 debit ($2,000 + $2,000). This double-debit compounds the error rather than clearing the account, causing trial balance imbalances and incorrect financial reporting.

Question 34

Which of the following accounts is classified as a temporary account?

• A) Common Stock

• B) Allowance for Doubtful Accounts

• C) Sales Returns and Allowances

• D) Notes Payable

Correct Answer: C) Sales Returns and Allowances

Explanation: Sales Returns and Allowances is a contra-revenue account, making it a temporary account associated with the income statement. It tracks product returns and price reductions for the current period and must be closed to zero at period-end. Common Stock (equity), Allowance for Doubtful Accounts (contra-asset), and Notes Payable (liability) are all permanent accounts whose balances carry over into future periods.

Question 35

If an entity fails to post the closing entry for Dividends:

• A) Net Income will be overstated.

• B) Retained Earnings will be overstated on the Post-Closing Trial Balance.

• C) Assets will be understated.

• D) Net Income will be understated.

Correct Answer: B) Retained Earnings will be overstated on the Post-Closing Trial Balance.

Explanation: Dividends reduce Retained Earnings. Closing dividends requires debiting Retained Earnings and crediting Dividends. If this entry is omitted, Retained Earnings will fail to reflect the dividend reduction and will remain overstated on the Post-Closing Trial Balance. Note that Net Income remains unaffected because dividends are profit distributions recorded outside the income statement and are never closed to Income Summary.

Question 36

Closing entries are posted to the general ledger:

• A) Daily as transactions occur

• B) At the end of every business week

• C) At the end of the accounting period, after financial statements are prepared

• D) At the beginning of the accounting period before transactions start

Correct Answer: C) At the end of the accounting period, after financial statements are prepared

Explanation: Closing entries occur at the very end of the accounting period as part of period-end procedures. They are executed strictly after adjusting entries have been made and financial statements have been compiled. Posting closing entries earlier would clear out revenue and expense data required for financial reporting, while posting them daily or weekly would disrupt performance tracking over the full accounting cycle.

Question 37

Which of the following temporary accounts requires a DEBIT to close its balance?

• A) Supplies Expense

• B) Sales Revenue

• C) Owner’s Drawings

• D) Cost of Goods Sold

Correct Answer: B) Sales Revenue

Explanation: To close a temporary account, you perform an entry opposite to its normal balance. Sales Revenue carries a normal credit balance. Therefore, closing Sales Revenue requires a debit entry equal to its balance. Supplies Expense, Owner’s Drawings, and Cost of Goods Sold all carry normal debit balances; closing them requires credit entries to bring their balances to zero.

Question 38

When closing entries are completed, which account reflects the cumulative earnings of a corporation retained in the business?

• A) Paid-in Capital

• B) Income Summary

• C) Retained Earnings

• D) Common Stock

Correct Answer: C) Retained Earnings

Explanation: Retained Earnings accumulates all historical net income earned by a corporation minus any net losses and dividends distributed since inception. When net income (via Income Summary) is credited and dividends are debited during closing entries, the updated balance in Retained Earnings precisely represents the net earnings retained within the enterprise for ongoing operations and growth.

Question 39

Compound closing entries are defined as:

• A) Closing entries that involve more than one debit or credit in a single journal entry

• B) Entries recorded in two different accounting years

• C) Entries closing both permanent and temporary accounts together

• D) Closing entries that include cash transactions

Correct Answer: A) Closing entries that involve more than one debit or credit in a single journal entry

Explanation: A compound journal entry is any entry that contains more than one debit, more than one credit, or both. In closing entries, accountants frequently use compound entries for efficiency—for example, closing multiple expense accounts at once by crediting each expense account individually and debiting Income Summary for the combined total, rather than writing separate entries for each expense.

Question 40

The closing entry for a firm with $100,000 in Revenues and $70,000 in Expenses will credit Retained Earnings by:

• A) $100,000

• B) $70,000

• C) $30,000

• D) $170,000

Correct Answer: C) $30,000

Explanation: Net Income is calculated as Revenues ($100,000) minus Expenses ($70,000), resulting in $30,000. In the closing process, revenues credit Income Summary ($100,000) and expenses debit Income Summary ($70,000), leaving a $30,000 credit balance in Income Summary. Closing Income Summary to Retained Earnings requires debiting Income Summary for $30,000 and crediting Retained Earnings for $30,000.

Question 41

Which of the following statements about permanent accounts is true?

• A) They are closed to Income Summary at year-end.

• B) They consist exclusively of income statement accounts.

• C) Their balances carry forward to the next accounting period.

• D) They always start with a zero balance each period.

Correct Answer: C) Their balances carry forward to the next accounting period.

Explanation: Permanent (real) accounts maintain cumulative balances over time and carry their ending balances forward to serve as beginning balances for the next period. They represent balance sheet components: assets, liabilities, and equity accounts. Unlike temporary accounts, permanent accounts are never closed to Income Summary or zeroed out at period-end, maintaining continuity across the entity’s entire life.

Question 42

What is the effect of closing a $3,000 Dividends account balance on the general ledger?

• A) Reduces Cash by $3,000

• B) Reduces Retained Earnings by $3,000 and zeroes the Dividends account

• C) Increases Net Income by $3,000

• D) Increases Income Summary by $3,000

Correct Answer: B) Reduces Retained Earnings by $3,000 and zeroes the Dividends account

Explanation: Closing the Dividends account involves debiting Retained Earnings for $3,000 and crediting Dividends for $3,000. This entry accomplishes two goals: it zeroes out the temporary Dividends account balance for the next period and reduces Retained Earnings on the balance sheet, accurately reflecting profit distributions made to stockholders. Cash is unaffected because dividends were already paid or declared earlier.

Question 43

Which account is credited when closing an expense account?

• A) Cash

• B) The specific Expense account

• C) Retained Earnings directly

• D) Accounts Payable

Correct Answer: B) The specific Expense account

Explanation: Expense accounts naturally hold debit balances. To reset an expense account balance to zero during the closing process, you must credit that specific expense account. The offsetting debit is recorded in the Income Summary account. Crediting the expense account eliminates its accumulated debit balance, leaving it clean with a zero balance to start tracking costs in the new accounting period.

Question 44

If an entity uses a worksheet, where do the values for closing entries originate?

• A) The Unadjusted Trial Balance columns

• B) The Income Statement columns

• C) The Balance Sheet columns only

• D) The Cash Flow columns

Correct Answer: B) The Income Statement columns

Explanation: When accountants use an end-of-period accounting worksheet, the Income Statement columns summarize all temporary revenue and expense account balances. The figures needed to journalize the closing entries for revenues and expenses are drawn directly from these Income Statement columns. Dividend or drawing balances are retrieved from the Balance Sheet/Statement of Retained Earnings columns on the worksheet.

Question 45

What happens to the Income Summary account after all four closing entries are posted?

• A) It holds a debit balance equal to net income.

• B) It holds a credit balance equal to net income.

• C) It has a zero balance.

• D) It is transferred to the Cash account.

Correct Answer: C) It has a zero balance.

Explanation: The Income Summary account is created solely as an intermediate holding account during closing. Revenues are credited to it, expenses are debited to it, and its remaining net balance (net income or net loss) is transferred out to Retained Earnings in step three of closing. Once that transfer entry is posted, the Income Summary account returns to a zero balance.

Question 46

Which of the following accounts is a temporary account that requires a CREDIT entry to close?

• A) Service Revenue

• B) Interest Revenue

• C) Advertising Expense

• D) Retained Earnings

Correct Answer: C) Advertising Expense

Explanation: Advertising Expense carries a normal debit balance because it is an expense account. To reduce its balance to zero during closing, it requires a credit entry. Service Revenue and Interest Revenue are revenue accounts with normal credit balances, requiring debit entries to close. Retained Earnings is a permanent account and is not closed out at period-end.

Question 47

If a company’s total revenues match its total expenses exactly, the closing entry for Income Summary will be:

• A) Debit Income Summary, Credit Retained Earnings

• B) Debit Retained Earnings, Credit Income Summary

• C) No entry is required for Income Summary

• D) Debit Cash, Credit Income Summary

Correct Answer: C) No entry is required for Income Summary

Explanation: If total revenues equal total expenses, net income is zero. Total revenue credits to Income Summary ($X) will equal total expense debits to Income Summary ($X), leaving an immediate zero balance in the Income Summary account. Because Income Summary has a zero balance, no entry is necessary to close Income Summary to Retained Earnings for that period.

Question 48

Posting closing entries causes which of the following accounts to increase?

• A) Expenses

• B) Revenues

• C) Dividends

• D) Retained Earnings (in a profitable year)

Correct Answer: D) Retained Earnings (in a profitable year)

Explanation: In a profitable year (where revenues exceed expenses), the closing process transfers net income into Retained Earnings via a credit entry. Crediting Retained Earnings increases its balance. Meanwhile, temporary accounts—Revenues, Expenses, and Dividends—are all decreased to zero balances during the closing process so that they can begin fresh in the upcoming accounting period.

Question 49

Which of the following statements is INCORRECT regarding closing entries?

• A) Closing entries bring temporary account balances to zero.

• B) Closing entries are recorded after preparing financial statements.

• C) Closing entries affect balance sheet asset accounts directly.

• D) Closing entries update the Retained Earnings balance.

Correct Answer: C) Closing entries affect balance sheet asset accounts directly.

Explanation: Closing entries exclusively target temporary accounts (revenues, expenses, dividends) and clearing/equity accounts (Income Summary, Retained Earnings/Capital). They do not directly involve or alter balance sheet asset or liability accounts such as Cash, Inventory, or Accounts Payable. Asset adjustments occur during standard operations or via adjusting entries, not through closing entries.

Question 50

Which of the following summarizes the complete post-closing status of the general ledger?

• A) Revenue accounts have credit balances; Expense accounts have debit balances.

• B) All accounts have zero balances.

• C) Temporary accounts have zero balances; Permanent accounts hold carrying balances.

• D) Income Summary carries the Net Income balance into the next period.

Correct Answer: C) Temporary accounts have zero balances; Permanent accounts hold carrying balances.

Explanation: Upon completion of the closing process and posting to the general ledger, all temporary accounts (revenues, expenses, dividends, and Income Summary) are left with zero balances. Permanent accounts (assets, liabilities, and equity) retain their ending balances, which carry forward into the next accounting period. This ensures financial continuity while maintaining strict segregation between accounting periods.

 

1. What is the primary purpose of closing entries?

2. Which of the following best describes “temporary accounts”?

3. Which of the following is considered a permanent account?

4. Which account will NOT appear on a post-closing trial balance?

5. The Income Summary account is classified as a:

6. What is the normal balance of the Income Summary account?

7. The first step in the closing process is to close:

8. To close an expense account, the required journal entry includes:

9. If the Income Summary account has a credit balance before it is closed, the company experienced:

10. If the Income Summary account has a debit balance before it is closed, the company experienced:

11. Which account is debited when closing the Income Summary account for a profitable period?

12. Dividends are closed directly to Retained Earnings rather than Income Summary because:

13. The correct entry to close the Dividends account is:

14. Which financial statement is prepared IMMEDIATELY before recording closing entries?

15. What is the purpose of a post-closing trial balance?

16. Which of the following accounts will appear on a post-closing trial balance?

17. Accumulated Depreciation is closed at the end of the accounting period. True or False?

18. How is a contra-revenue account, like Sales Returns and Allowances, closed?

19. What happens if a company fails to close its revenue accounts at year-end?

20. What is the impact of failing to close expense accounts?

21. Which document provides the necessary data to journalize closing entries?

22. Do closing entries affect the total Assets of a company?

23. How do closing entries affect the accounting equation (Assets = Liabilities + Equity)?

24. In a sole proprietorship, the Income Summary account is closed to:

25. How is the Owner’s Drawings account closed in a sole proprietorship?

26. In a partnership, net income is closed to:

27. Which of the following is a contra-asset account that is NOT closed?

28. Prepaid Insurance is considered a:

29. If a company fails to close the Dividends account, what is the result?

30. Which step immediately follows the journalizing and posting of closing entries?

31. Are reversing entries a mandatory part of the closing process?

32. What happens to the balance of the Retained Earnings account after all closing entries are posted?

33. Which account is credited when closing a net loss to Retained Earnings?

34. Cost of Goods Sold (COGS) is closed to:

35. If total revenues are $50,000 and total expenses are $60,000, the closing entry for Income Summary includes:

36. Which of the following accounts is NOT closed at the end of the year?

37. The entry to close Sales Revenue to Income Summary involves:

38. What is the effect of closing entries on a company’s cash flow?

39. Which trial balance is used to prepare the Income Statement?

40. A company forgot to record the closing entry for Depreciation Expense. What is the impact?

41. Are liability accounts like Notes Payable closed at year-end?

42. Which account is debited when closing a contra-revenue account like Sales Discounts?

43. If a temporary account has a zero balance before closing entries are made, what should the accountant do?

44. The Dividends account is closed to:

45. What defines the “accounting cycle”?

46. Which of the following accounts would NOT be found in the adjusted trial balance?

47. A credit balance in the Income Summary account indicates:

48. When closing the Income Summary account with a net income balance, Retained Earnings is:

49. Which of the following statements about the post-closing trial balance is FALSE?

50. What is the final step of the accounting cycle?