Closing Entries Quiz : 100 True or False Questions with Answers

Accounting Cycle Quiz

How well do you understand closing entries in accounting? Take this 50-question Closing Entries Quiz and test your knowledge with true or false questions covering temporary accounts, permanent accounts, Income Summary, Retained Earnings, dividends, and the post-closing trial balance. Each question includes the correct answer and a detailed explanation to help you strengthen your accounting knowledge.

Answer: True

Explanation:
The post-closing trial balance should contain only permanent accounts because all temporary accounts have been closed. Typical accounts included are Cash, Accounts Receivable, Inventory, Equipment, Accounts Payable, Notes Payable, Common Stock, and Retained Earnings. Revenue, expense, and Dividends accounts should have zero balances and therefore should not appear. The post-closing trial balance verifies that the ledger is balanced after closing and provides the permanent account balances that carry into the next accounting period.

Closing Entries Quiz: True or False Questions

Question 1

Permanent accounts are closed at the end of every accounting period to reset their balances to zero.

Answer: False

Explanation: Only temporary (nominal) accounts—such as revenues, expenses, and dividends—are closed at the end of an accounting period. Permanent (real) accounts include assets, liabilities, and equity accounts like Retained Earnings or Common Stock. Their balances carry forward continuously from one accounting period to the next. Resetting permanent accounts to zero would wipe out a company’s historical balance sheet data, whereas temporary accounts are zeroed out specifically to isolate and measure net financial performance for a single period without mixing data across different timeframes.

Question 2

The primary purpose of closing entries is to update the Retained Earnings account and zero out temporary accounts.

Answer: True

Explanation: Closing entries serve two main functions in the accounting cycle. First, they reduce the balances of all temporary accounts (revenues, expenses, and distributions) to zero so that these accounts can collect fresh data for the upcoming accounting period. Second, they transfer the net results of operations (net income or net loss) and dividend distributions directly into Retained Earnings. This updates the stockholders’ equity balance on the balance sheet, ensuring that accumulated undistributed profits accurately reflect all past operational activity up to the period end.

Question 3

Revenue accounts naturally carry credit balances and require a debit entry to close them.

Answer: True

Explanation: Under double-entry accounting rules, revenue increases equity and therefore carries a normal credit balance. To close a revenue account at the end of an accounting period, its full balance must be reduced to zero. This is achieved by recording a debit entry equal to the account’s total ending credit balance. The corresponding credit entry is made to the Income Summary account (or directly to Retained Earnings). This debit entry successfully clears the revenue account, preparing it to record income earned in the subsequent period.

Question 4

The Income Summary account appears as a permanent liability on the balance sheet.

Answer: False

Explanation: The Income Summary account is a temporary clearing account used strictly during the period-end closing process. It does not appear on any financial statement, including the income statement or the balance sheet. Its sole function is to aggregate total revenues and total expenses to calculate net income or loss before transferring that net figure into Retained Earnings. Once the closing process is completed, the Income Summary account itself is closed to zero and holds no balance to report on any formal financial statement.

Question 5

Expense accounts are credited during the closing process to bring their balances to zero.

Answer: True

Explanation: Expense accounts track costs incurred during an accounting period and carry normal debit balances. To reset an expense account to a zero balance during closing, accountants must credit the account for an amount equal to its total debit balance. The sum of these individual expense credits is matched with a total debit to the Income Summary account. Crediting the expense accounts ensures that operational costs are cleared, preventing previous expenses from contaminating performance metrics in the following accounting cycle.

Question 6

Dividends are closed to the Income Summary account because they reduce net income.

Answer: False

Explanation: Dividends represent a distribution of corporate profits to shareholders rather than an operating expense incurred to generate revenue. Because dividends do not impact net income calculation, they are never closed to the Income Summary account. Instead, the Dividends account—which holds a normal debit balance—is closed directly to Retained Earnings by crediting Dividends and debiting Retained Earnings. This directly reduces stockholders’ equity without misstating the company’s net income or operational profitability on the income statement for the period.

Question 7

A credit balance in the Income Summary account after closing revenues and expenses indicates a net income.

Answer: True

Explanation: During the closing process, revenue accounts are closed with credits to Income Summary, while expense accounts are closed with debits to Income Summary. If total revenue credits exceed total expense debits, the Income Summary account ends up with a net credit balance. Because revenues exceed expenses, this credit balance directly represents net income earned during the period. To complete the closing sequence, this credit balance is debited out of Income Summary and credited into Retained Earnings, increasing stockholders’ equity.

Question 8

The post-closing trial balance includes temporary accounts with non-zero balances.

Answer: False

Explanation: The post-closing trial balance is prepared immediately after all closing entries have been posted to the general ledger. Its main objective is to verify that total debits equal total credits before entering the new period. Because the closing process completely zeroes out all temporary accounts (revenues, expenses, and dividends), these accounts will show zero balances and are excluded from the post-closing trial balance. The post-closing trial balance contains exclusively permanent balance sheet accounts: assets, liabilities, and ending equity.

Question 9

Closing entries are recorded before the financial statements are prepared.

Answer: False

Explanation: Closing entries occur near the very end of the accounting cycle, strictly after financial statements have been compiled. Financial statements—such as the Income Statement, Statement of Retained Earnings, and Balance Sheet—are prepared using the adjusted trial balance. If closing entries were posted prior to statement preparation, temporary revenue and expense accounts would already be zeroed out, making it impossible to pull performance figures to draft the Income Statement. Closing entries serve to finalize the ledger after reporting is complete.

Question 10

Failure to close revenue accounts at year-end results in an overstatement of net income in the following period.

Answer: True

Explanation: If revenue accounts are not closed at the end of an accounting year, their credit balances carry forward into the subsequent period. When new revenues are recorded in the next period, they add to the uncleared previous balances. This results in artificially inflated revenue figures and a significant overstatement of net income for the second period. Closing entries enforce the periodicity assumption by ensuring that each accounting period begins with clean slate revenue accounts that reflect only current operational performance.

Question 11

Accumulated Depreciation is a temporary account that must be closed to zero at period-end.

Answer: False

Explanation: Accumulated Depreciation is a contra-asset account, not an expense account. Because it is paired directly with long-term fixed assets on the balance sheet, it is classified as a permanent (real) account. It accumulates total asset depreciation over time across multiple accounting periods and is never closed during period-end procedures. In contrast, Depreciation Expense is a temporary income statement account that tracks depreciation for the current period only and must be credited to zero during closing entries.

Question 12

A company that incurs a net loss will credit Income Summary when closing it to Retained Earnings.

Answer: True

Explanation: When expenses exceed revenues, a net loss occurs, resulting in a debit balance in the Income Summary account after revenues and expenses are transferred in. To close a debit balance in Income Summary and bring it to zero, a credit entry to Income Summary is required. The offsetting debit entry is made to Retained Earnings. Debiting Retained Earnings reduces the cumulative equity balance, correctly reflecting the loss sustained by the enterprise during that operational period.

Question 13

The Dividends account carries a normal credit balance before closing entries.

Answer: False

Explanation: Dividends represent distributions of equity to owners and reduce total stockholders’ equity. Following standard debit/credit rules, equity reductions are recorded as debits; thus, the Dividends account carries a normal debit balance prior to closing. During the period-end closing procedures, the Dividends account must be credited for its total ending balance to reset it to zero. The corresponding debit is applied directly to Retained Earnings, reducing cumulative equity while clearing the dividend distribution tracker.

Question 14

Closing entries can be performed using a single compound entry or multiple sequential steps.

Answer: True

Explanation: Accountants can execute closing entries using different structural methods. The traditional four-step approach uses the Income Summary account to sequentially close revenues, close expenses, close net income/loss to Retained Earnings, and close dividends. Alternatively, a compound entry or simplified two-step approach closes all revenues and expenses directly into Retained Earnings in consolidated entries, bypassing Income Summary entirely. Both techniques achieve the same end result: zeroing out temporary account balances and accurately updating Retained Earnings for the new period.

Question 15

Unearned Revenue is a temporary account that is closed at the end of the year.

Answer: False

Explanation: Unearned Revenue is a liability account on the balance sheet, representing cash received from customers for goods or services that have not yet been provided. Because it represents an ongoing performance obligation owed to customers, it is classified as a permanent (real) account. It carries its balance forward into subsequent periods until the performance obligation is satisfied and the revenue is earned. It is adjusted during period-end adjusting entries, but it is never zeroed out during closing entries.

Question 16

Retained Earnings is a permanent equity account that accumulates net income and deducts net losses and dividends over time.

Answer: True

Explanation: Retained Earnings is a core balance sheet equity account that tracks the cumulative net earnings retained in the business since its inception, minus any dividends paid out to shareholders. As a permanent account, its balance carries forward from year to year. During the closing process, current period net income increases Retained Earnings through credit entries (or net losses decrease it via debits), while dividends reduce it. This keeps the corporate balance sheet updated with total retained historical earnings.

Question 17

Closing entries are initially recorded in the general ledger before being journalized.

Answer: False

Explanation: In double-entry bookkeeping, all accounting transactions—including adjusting and closing entries—must first be entered chronologically in the General Journal. Journalizing creates an official, auditable historical transaction record. After closing entries are journalized, they are posted to the individual ledger accounts in the General Ledger to update account balances, bringing temporary accounts to zero and updating Retained Earnings. Recording directly into the ledger without prior journal entries violates basic accounting control procedures.

Question 18

If total revenues equal total expenses, no entry is required to close the Income Summary account to Retained Earnings.

Answer: True

Explanation: When total revenues equal total expenses, the net income for the period is zero. When revenues are credited to Income Summary and expenses are debited to Income Summary, the two totals cancel each other out completely, leaving an immediate zero balance in Income Summary. Because there is no net income or net loss balance remaining in Income Summary, no transfer entry to Retained Earnings is necessary, though closing entries for individual revenue and expense accounts still take place.

Question 19

The Periodicity Concept is the accounting principle that supports zeroing temporary accounts at period end.

Answer: True

Explanation: The Periodicity Concept (or Time Period Assumption) states that an entity’s economic life can be divided into distinct, artificial time periods such as quarters or years. To assess financial performance accurately for a specific time interval, revenues and expenses must belong exclusively to that timeframe. Closing temporary accounts enforces periodicity by resetting revenue, expense, and distribution counters to zero, preventing historical performance data from bleeding into future periods and misstating comparative financial reports.

Question 20

Posting closing entries alters the total dollar value of the accounting equation ( $Assets = Liabilities + Equity$ ).

Answer: False

Explanation: Posting closing entries does not change the overall balances of total assets, total liabilities, or total equity. Closing entries merely reclassify components within the equity section of the balance sheet. Temporary equity items (revenues, expenses, dividends) are consolidated and transferred into permanent equity (Retained Earnings). The economic events that affected assets, liabilities, or total equity were already recognized when transactions occurred during the period; closing entries simply organize ledger records for the next period.

Question 21

The entry to close expenses requires a debit to the Income Summary account for the combined total of all expenses.

Answer: True

Explanation: Because individual expense accounts carry normal debit balances, closing them requires crediting each individual expense account for its full ending balance. To keep the overall journal entry in balance under double-entry rules, the Income Summary account is debited for the single combined total of all expense credits. This aggregates all operating costs incurred during the period into the debit side of Income Summary, where they offset total revenues to compute net income or loss.

Question 22

Sales Discounts and Sales Returns and Allowances are permanent accounts that are not closed at year-end.

Answer: False

Explanation: Sales Discounts and Sales Returns and Allowances are contra-revenue accounts that offset gross sales on the income statement. Because they are income statement accounts, they are classified as temporary accounts. They accumulate deductions from revenue for a single period only. At period-end, both accounts carry normal debit balances and must be closed by crediting them and debiting Income Summary (or Revenues), resetting their balances to zero for the upcoming accounting year.

Question 23

Sole proprietorships close their temporary accounts into an Owner’s Capital account rather than Retained Earnings.

Answer: True

Explanation: Sole proprietorships do not issue shares of stock and therefore do not maintain a Retained Earnings account. Instead, the owner’s cumulative equity is held in an Owner’s Capital account. During the closing process, revenues, expenses (via Income Summary), and the Owner’s Drawing account are closed directly into Owner’s Capital. Corporations use Retained Earnings for undistributed profits, whereas unincorporated single-owner businesses centralize all equity updates and profit retention directly within the Owner’s Capital account.

Question 24

A post-closing trial balance includes both income statement accounts and balance sheet accounts.

Answer: False

Explanation: A post-closing trial balance is constructed after all temporary accounts have been closed to zero. Income statement accounts (revenues and expenses) are temporary accounts that have already been cleared out during the closing process. Therefore, a post-closing trial balance contains strictly balance sheet accounts—assets, liabilities, and permanent equity accounts. If an income statement account appears with a balance on a post-closing trial balance, it indicates an error in journalizing or posting closing entries.

Question 25

The entry to close the Service Revenue account with a balance of $25,000 includes a credit to Service Revenue.

Answer: False

Explanation: Service Revenue holds a normal credit balance of $25,000 throughout the operational period. To close Service Revenue and bring its balance to zero, the entry requires adebit to Service Revenue for $25,000. Crediting Service Revenue for $25,000 would incorrectly double its balance to $50,000 credit. The corresponding credit in the closing entry is made to Income Summary for $25,000, successfully shifting the earned revenue balance into the clearing account.

Question 26

Prepaid Expenses are closed to Income Summary at the end of the accounting period.

Answer: False

Explanation: Prepaid Expenses (such as Prepaid Insurance or Prepaid Rent) represent future economic benefits owned by the business and are classified as current asset accounts on the balance sheet. Because assets are permanent (real) accounts, Prepaid Expenses are not closed at period-end. Any portion of a prepaid asset that expires or is consumed during the period is transferred to an expense account via adjusting entries before closing entries are executed.

Question 27

Closing entries are typically performed annually, but can also be executed at the end of monthly or quarterly periods.

Answer: True

Explanation: While annual closing is standard for tax and corporate reporting, businesses that prepare formal monthly or quarterly financial statements may perform interim closing entries. Performing interim closing resets temporary accounts at the end of each month or quarter, allowing management to evaluate isolated performance for that specific interim window. Whether annual or interim, closing entries ensure that performance tracking accounts are zeroed out at the end of any defined accounting timeframe.

Question 28

If an accountant forgets to post the closing entry for Dividends, net income for the period will be overstated.

Answer: False

Explanation: Dividends are profit distributions recorded outside the calculation of net income. They are closed directly to Retained Earnings and do not pass through the Income Statement or the Income Summary account. Omitting the closing entry for Dividends leaves the Dividends account uncleared and overstates Retained Earnings on the post-closing trial balance, but it has zero impact on reported Net Income for the period.

Question 29

A debit balance in the Income Summary account prior to closing it to Retained Earnings indicates that expenses exceeded revenues.

Answer: True

Explanation: During closing, revenue credits are posted to the credit side of Income Summary and expense debits are posted to the debit side. If total expense debits exceed total revenue credits, the Income Summary account will show a remaining debit balance. This debit balance represents a net loss for the accounting period. Closing this net loss requires crediting Income Summary and debiting Retained Earnings, which reduces stockholders’ equity.

Question 30

Cost of Goods Sold is a temporary expense account that is closed at the end of the accounting period.

Answer: True

Explanation: Cost of Goods Sold (COGS) represents the direct cost of inventory sold during an accounting period and is reported as a major expense on the income statement. Because it is an income statement account, COGS is a temporary account carrying a normal debit balance. At period-end, COGS is closed by crediting the Cost of Goods Sold account for its ending balance and debiting the Income Summary account.

Question 31

The General Ledger is updated with closing entries prior to preparing the Adjusted Trial Balance.

Answer: False

Explanation: In the standard sequence of the accounting cycle, the Adjusted Trial Balance is preparedbefore closing entries are journalized and posted. The Adjusted Trial Balance incorporates all period-end adjusting entries and provides the verified balances used to construct the financial statements. Closing entries are performed after financial statement preparation, followed by posting to the General Ledger and finalizing with the Post-Closing Trial Balance.

Question 32

Closing entries ensure that revenue earned in 2025 is not reported as revenue in 2026.

Answer: True

Explanation: The primary function of closing entries is to isolate revenues and expenses within their specific reporting period. By debiting revenue accounts to zero at the end of 2025, any revenues recognized in 2026 start accumulating from a zero base. Without closing entries, 2025 revenues would remain in the accounts, contaminating 2026 financial records and violating both the matching principle and time period assumption required by GAAP and IFRS.

Question 33

The Income Summary account can carry a non-zero beginning balance at the start of a new fiscal year.

Answer: False

Explanation: The Income Summary account is created exclusively during the period-end closing routine and is completely closed out before the period concludes. In step three of the closing process, its entire net balance (net income or loss) is transferred into Retained Earnings, leaving Income Summary with a zero balance. Consequently, Income Summary always starts with a zero balance and remains dormant until closing entries are executed again at the next period-end.

Question 34

An entry debiting Income Summary for $12,000 and crediting Retained Earnings for $12,000 represents the closing of a net loss.

Answer: False

Explanation: An entry debiting Income Summary and crediting Retained Earnings transfers a netincome balance into equity. Net income creates a credit balance in Income Summary; debiting Income Summary clears that credit balance to zero, while crediting Retained Earnings increases stockholders’ equity by $12,000. Conversely, closing a net loss requires debiting Retained Earnings (to reduce equity) and crediting Income Summary (to clear its debit balance).

Question 35

Interest Expense and Depreciation Expense are closed in the same entry that closes operational expenses.

Answer: True

Explanation: All expense accounts—whether classified as operating expenses (like Salaries Expense), administrative expenses (like Depreciation Expense), or non-operating expenses (like Interest Expense)—are temporary accounts. During closing, all expense accounts carrying debit balances are typically consolidated into a single compound closing entry where each individual expense account is credited, and Income Summary is debited for the total aggregate cost.

Question 36

Interest Revenue requires a credit entry to Income Summary when being closed.

Answer: True

Explanation: Interest Revenue carries a normal credit balance on the income statement. To close Interest Revenue, the account must be debited for its full ending balance to bring it to zero. To maintain balanced debits and credits, the offsetting credit entry is posted to the Income Summary account. Crediting Income Summary transfers the interest earned into the clearing account alongside other revenue streams.

Question 37

Reversing entries are identical to closing entries and are performed at the same time.

Answer: False

Explanation: Reversing entries and closing entries serve completely different purposes and occur at different times in the accounting cycle. Closing entries are mandatory steps performed at period-end to zero out temporary accounts and update equity. Reversing entries are optional entries made on the first day of anew accounting period to simplify the recording of subsequent routine transactions related to accrued items. They are not identical in structure or timing.

Question 38

All accounts listed on the Income Statement must have a zero balance after closing entries are posted.

Answer: True

Explanation: The Income Statement reports financial performance over a specified time period using temporary accounts: revenues, gains, expenses, and losses. A core objective of the closing process is to reset every single income statement account balance to zero. After closing entries are journalized and posted to the general ledger, all income statement accounts hold zero balances, ready to track performance for the next reporting cycle.

Question 39

Allowance for Doubtful Accounts is closed to Retained Earnings during the final closing entry.

Answer: False

Explanation: Allowance for Doubtful Accounts is a permanent contra-asset account linked directly to Accounts Receivable on the balance sheet. It estimates uncollectible receivables across accounting periods. Because it is a balance sheet account, it is never closed to Retained Earnings or zeroed out during closing entries. Instead, its ending balance carries forward into the next period and is adjusted periodically using Bad Debt Expense entries.

Question 40

Closing entries are optional for small businesses using double-entry accounting.

Answer: False

Explanation: Closing entries are a mandatory component of double-entry accounting under GAAP and IFRS, regardless of business size. Without closing entries, temporary account balances would accumulate indefinitely across operating years, rendering income statements inaccurate and making it impossible to calculate period-specific net income. Furthermore, Retained Earnings or Capital balances on the balance sheet would remain unupdated and misleading without formal closing entries.

Question 41

If a company has total revenues of $50,000 and total expenses of $60,000, closing the Income Summary account requires a debit to Retained Earnings of $10,000.

Answer: True

Explanation: Expenses ($60,000) exceed revenues ($50,000), resulting in a net loss of $10,000 and leaving a $10,000 debit balance in Income Summary. Closing Income Summary requires crediting Income Summary for $10,000 to bring it to zero, and debiting Retained Earnings for $10,000. Debiting Retained Earnings accurately reflects the $10,000 reduction in stockholders’ equity caused by operating at a loss during the period.

Question 42

Gains on the Sale of Assets carry normal credit balances and are closed by debiting the Gain account and crediting Income Summary.

Answer: True

Explanation: Gains increase total equity and carry normal credit balances on the income statement, functioning similarly to revenues. To close a Gain on Sale of Assets account, it must be debited for its ending balance to bring it to zero. The offsetting credit is made to the Income Summary account, incorporating the non-operating gain into the calculation of total net income for the period.

Question 43

The Dividends account is closed by debiting Dividends and crediting Income Summary.

Answer: False

Explanation: The Dividends account carries a normal debit balance. Closing it requires a credit to Dividends to reset its balance to zero. Furthermore, because dividends are profit distributions and not operating expenses, they are closed directly to Retained Earnings, not Income Summary. The correct closing entry is a debit to Retained Earnings and a credit to Dividends.

Question 44

Worksheet columns for the Income Statement help accountants identify the balances needed for revenue and expense closing entries.

Answer: True

Explanation: When accountants use an end-of-period accounting worksheet, all adjusted temporary revenue and expense account balances are extended directly into the Income Statement columns. These columns organize all revenues (credits) and expenses (debits) in one place, allowing accountants to easily pull exact figures to draft journal entries for closing revenues and expenses into Income Summary.

Question 45

Equipment Expense is a valid temporary account that is closed at period-end.

Answer: False

Explanation: “Equipment Expense” is not a standard accounting term. Equipment purchase costs are capitalized as fixed asset accounts (Equipment) on the balance sheet rather than expensed immediately. The cost of equipment is allocated over time via Depreciation Expense (a temporary account) and Accumulated Depreciation (a permanent contra-asset account). Equipment itself is a permanent asset account and is never closed during period-end routines.

Question 46

Closing temporary accounts allows financial analysts to compare performance across distinct accounting periods accurately.

Answer: True

Explanation: Comparability is a fundamental qualitative characteristic of financial reporting. By zeroing out temporary accounts at the end of each period, financial analysts can compare isolated monthly, quarterly, or annual results without interference from prior historical data. Resetting account counters ensures that revenues and expenses reflect only current operations, providing clean data for trend analysis, ratio evaluation, and performance forecasting.

Question 47

If an accountant closes expenses by crediting Income Summary and debiting Expense accounts, the trial balance will balance.

Answer: True

Explanation: Double-entry rules require equal debits and credits in every journal entry. If an accountant debits Expense accounts and credits Income Summary, total debits still equal total credits, so the post-closing trial balance will technically remain mathematically balanced. However, this entry is conceptually incorrect because it doubles the debit balances of expense accounts instead of zeroing them out, causing severe errors in general ledger records.

Question 48

Dividends paid during the year directly decrease the calculation of Net Income on the Income Statement.

Answer: False

Explanation: Dividends represent a distribution of corporate profits to owners, not a cost incurred to generate revenue. Therefore, dividends are completely excluded from the Income Statement and do not reduce Net Income. Net Income measures pure operational performance (Revenues minus Expenses). Dividends are recorded on the Statement of Retained Earnings and directly reduce Retained Earnings during period-end closing entries.

Question 49

After all closing entries are posted, the balance in Retained Earnings matches the ending Retained Earnings balance reported on the Balance Sheet.

Answer: True

Explanation: Prior to closing entries, the Retained Earnings account in the general ledger reflects only the beginning balance for the period. Posting closing entries transfers current-period net income (or loss) and dividend reductions directly into the Retained Earnings general ledger account. Once posted, the ledger balance updates to reflect ending Retained Earnings, perfectly matching the figure reported on both the Statement of Retained Earnings and the Balance Sheet.

Question 50

Closing entries represent the final physical step executed in the accounting cycle.

Answer: False

Explanation: While closing entries occur near the end of the accounting cycle, they are not the absolute final step. Journalizing and posting closing entries is followed immediately by preparing the Post-Closing Trial Balance. The post-closing trial balance acts as the final verification check, proving that temporary accounts are zeroed out and that debits equal credits among permanent accounts before the accounting system opens for the new fiscal period.

Closing Entries Quiz: 50 True or False Questions with Answers and Detailed Explanations

1. Closing entries are made to transfer the balances of temporary accounts to permanent accounts at the end of the accounting period. Answer: True Closing entries reset revenue, expense, and dividend (or drawing) accounts to zero by transferring their balances into permanent equity accounts such as Retained Earnings or Owner’s Capital. This process isolates each period’s performance, updates equity for net income or loss and distributions, and prepares the temporary accounts for the next period. Without closing entries, temporary balances would accumulate indefinitely, making period-by-period income measurement impossible and violating the periodicity assumption that underlies financial reporting.

2. Permanent accounts such as Cash and Accounts Payable are closed at the end of each accounting period. Answer: False Permanent (real) accounts—assets, liabilities, and equity accounts—carry their ending balances forward into the next period and appear on the post-closing trial balance and balance sheet. Only temporary (nominal) accounts are closed. Closing permanent accounts would erase the continuous historical record of the entity’s financial position and produce incorrect beginning balances for the subsequent period, destroying the integrity of the accounting equation over time.

3. The Income Summary account is a permanent equity account that appears on the balance sheet. Answer: False Income Summary is a temporary clearing account used solely during the closing process. Revenues are closed into it, expenses are closed into it, and its resulting balance (net income or net loss) is then closed to Retained Earnings. After the closing entries are posted, Income Summary has a zero balance and does not appear on any formal financial statement. It exists only to facilitate the orderly transfer of period results into permanent equity.

4. To close a revenue account, the accountant debits the revenue account and credits Income Summary. Answer: True Revenue accounts normally carry credit balances. Debiting the revenue account for its full balance zeros the account, while crediting Income Summary transfers the revenue amount into the clearing account. This is the first standard closing entry. The opposite entry would increase rather than close the revenue balance and would prevent accurate calculation of net income in Income Summary.

5. Expense accounts are closed by debiting each expense and crediting Income Summary. Answer: False Expense accounts carry debit balances. To close them, the accountant debits Income Summary for the total of all expenses and credits each individual expense account. This moves the expense amounts into Income Summary so they can be matched against revenues. Debiting the expense accounts would increase rather than eliminate their balances, leaving temporary accounts open and distorting the net-income figure transferred to equity.

6. A credit balance remaining in Income Summary after revenues and expenses have been closed represents a net loss. Answer: False A credit balance in Income Summary indicates that total revenues exceeded total expenses, producing net income. That credit balance is closed by debiting Income Summary and crediting Retained Earnings. A debit balance in Income Summary signals a net loss and is closed by debiting Retained Earnings and crediting Income Summary. Confusing the two directions leads to an incorrect update of equity.

7. Dividends (or Owner’s Drawings) are closed directly to Retained Earnings (or Owner’s Capital) rather than through Income Summary. Answer: True Dividends and drawings are distributions of earnings, not expenses used to determine net income. Therefore they bypass Income Summary. The closing entry debits Retained Earnings (or Capital) and credits the Dividends (or Drawing) account, reducing equity for the amount distributed. Routing dividends through Income Summary would incorrectly treat them as expenses and understate reported net income.

8. Closing entries are prepared after the adjusted trial balance and after the financial statements have been completed. Answer: True The adjusted trial balance supplies the final balances of the temporary accounts that must be closed. Financial statements are prepared from those adjusted balances. Only after the statements are finished are the closing entries journalized and posted. Performing closing entries earlier would use incomplete data and would prevent the income statement from reflecting the proper period results.

9. After all closing entries are posted, the post-closing trial balance contains only permanent accounts. Answer: True Temporary accounts have been reduced to zero, so the post-closing trial balance lists solely assets, liabilities, and equity accounts (including the updated Retained Earnings). Its purpose is to verify that the ledger is in balance and ready for the next period. Any temporary account still showing a balance indicates an error in the closing process that must be corrected before the new period begins.

10. The normal sequence of closing entries is: close revenues, close expenses, close Income Summary, then close dividends. Answer: True This order ensures that net income is correctly computed in Income Summary before it is transferred to equity, and that distributions are deducted last. Closing dividends before Income Summary, or closing expenses before revenues, produces intermediate balances that are harder to interpret and increases the risk of arithmetic or conceptual errors during the process.

11. Closing entries affect the cash account. Answer: False Closing entries are internal transfers among equity-related accounts only. They never involve cash or any other asset or liability. Cash balances change only when actual cash transactions occur. The closing process merely relocates the already-recorded effects of revenues, expenses, and dividends into permanent equity; it does not create or destroy cash.

12. In a sole proprietorship, net income is closed to the Owner’s Capital account. Answer: True Sole proprietorships and partnerships do not use a Retained Earnings account. Instead, the balance of Income Summary is closed directly to the Owner’s Capital (or Partners’ Capital) accounts. The Drawing account is closed separately to Capital. The conceptual result is identical to the corporate process: equity is updated for the period’s profit or loss and for owner withdrawals.

13. Accumulated Depreciation is a temporary account that is closed at year-end. Answer: False Accumulated Depreciation is a permanent contra-asset account. It is adjusted each period for the current depreciation expense, but its cumulative balance carries forward indefinitely and appears on the balance sheet. Only the related Depreciation Expense account is closed. Treating Accumulated Depreciation as temporary would erase the historical cost allocation and misstate the book value of the related asset.

14. If a company reports a net loss, Retained Earnings is debited when Income Summary is closed. Answer: True A net loss produces a debit balance in Income Summary. Closing that balance requires a debit to Retained Earnings (reducing equity) and a credit to Income Summary (zeroing the clearing account). The opposite entry would be used for net income. This entry ensures that the permanent equity account correctly reflects the economic loss incurred during the period.

15. Unearned Revenue is closed at the end of the accounting period. Answer: False Unearned Revenue is a liability account representing obligations still outstanding. It is adjusted when revenue is earned, but the remaining liability balance is permanent and is never closed. Only the revenue that has been earned is closed through the normal revenue-closing process. Closing the liability itself would incorrectly eliminate a real obligation from the balance sheet.

16. The purpose of closing entries is closely tied to the periodicity (time-period) assumption. Answer: True The periodicity assumption requires that a business’s continuous life be divided into discrete reporting periods. Closing entries enforce this assumption by isolating each period’s revenues and expenses, transferring the net result to permanent equity, and resetting temporary accounts to zero. Without them, income measurement would span multiple periods and lose meaning for users who rely on timely, period-specific information.

17. After closing entries, all accounts in the ledger have zero balances. Answer: False Only temporary accounts are reduced to zero. Permanent accounts retain their ending balances and continue into the next period. If every account were zeroed, the entity would have no assets, liabilities, or equity at the start of the new period—an obvious impossibility. The distinction between temporary and permanent accounts is fundamental to the closing process.

18. A compound closing entry can be used to close all expense accounts in a single journal entry. Answer: True One efficient method is to debit Income Summary for the total of all expense balances and credit each individual expense account for its own balance. This single compound entry zeros every expense account at once. Separate entries for each expense are also acceptable; the compound form simply reduces the number of lines required in the general journal.

19. Dividends declared but not yet paid are still closed at period-end. Answer: True The temporary Dividends account is closed regardless of payment status. The entry debits Retained Earnings and credits Dividends. The related liability (Dividends Payable) remains on the balance sheet until cash is actually distributed and is never part of the closing process. Timing of the cash payment does not affect the need to clear the temporary Dividends account.

20. Closing entries are dated as of the first day of the new accounting period. Answer: False Closing entries are dated as of the last day of the accounting period so that temporary accounts are cleared as of the official period-end date. This keeps the books consistent with the financial statements that report results through that date. Although the entries may be recorded in the journal a few days later, their formal date remains the period-end date.

21. The post-closing trial balance is used to prepare the income statement. Answer: False The income statement is prepared from the adjusted trial balance, before closing entries are made. The post-closing trial balance is prepared after closing and contains only permanent accounts; it therefore cannot supply the revenue and expense figures needed for the income statement. Its sole purpose is to confirm that the ledger is in balance and ready for the next period.

22. Failing to close the Dividends account causes Retained Earnings to be overstated. Answer: True Omitting the closing entry that debits Retained Earnings and credits Dividends leaves the reduction in equity unrecorded. Consequently, the Retained Earnings balance reported on the balance sheet is higher than it should be. Net income itself is unaffected because dividends never flow through Income Summary, but the equity section is misstated and a temporary account remains open.

23. Income Summary appears on the formal income statement. Answer: False Income Summary is an internal clearing account used only during the closing process. Once its balance has been transferred to Retained Earnings, it has a zero balance and is not reported on the income statement, balance sheet, or any other published financial statement. Users of the statements never see the account; they see only the net income figure that was derived from it.

24. Closing entries must be formally journalized and posted to the ledger; a worksheet alone is not sufficient. Answer: True Although many accountants use a worksheet that includes closing columns for planning purposes, the actual closing entries must be recorded in the general journal and posted to the ledger accounts. Only after posting do the temporary accounts reach zero balances. Relying solely on a worksheet leaves the formal ledger unclosed and incorrect for the subsequent period.

25. In the closing process, a net income increases Retained Earnings. Answer: True When Income Summary has a credit balance (net income), the closing entry debits Income Summary and credits Retained Earnings. This credit increases the Retained Earnings balance, reflecting the addition of the period’s profit to permanent equity. The increase appears in the statement of retained earnings and on the balance sheet, updating owners’ claim on the net assets of the entity.

26. Cost of Goods Sold is a permanent account and is not closed. Answer: False Cost of Goods Sold is a temporary expense account. Its debit balance is closed by debiting Income Summary and crediting Cost of Goods Sold, exactly like any other expense. Inventory itself is a permanent asset account and is not closed. The distinction is important under both perpetual and periodic inventory systems.

27. Reversing entries, if used, are made immediately after closing entries. Answer: True Optional reversing entries are recorded on the first day of the new accounting period. They reverse certain prior-period adjusting entries (usually accruals) so that subsequent cash transactions can be recorded routinely. Closing entries must be completed first; reversing entries do not replace or precede them. Permanent accounts are never reversed as part of this optional procedure.

28. The balance of the Owner’s Drawing account is closed to Income Summary. Answer: False In a sole proprietorship, the Drawing account is closed directly to Owner’s Capital by debiting Capital and crediting Drawing. Drawings are distributions, not expenses, so they do not pass through Income Summary. Treating them as expenses would understate net income and misstate the owner’s equity.

29. After closing entries, the Retained Earnings account equals beginning Retained Earnings plus net income minus dividends. Answer: True The two closing entries that affect Retained Earnings produce exactly this arithmetic result: a credit for net income and a debit for dividends. The updated balance is the amount reported on the balance sheet and in the statement of retained earnings. This relationship holds whether the entries are made separately or combined into a single net entry.

30. Prepaid expenses are closed at the end of the period. Answer: False Prepaid expenses are permanent asset accounts. The portion that has expired is recognized as an expense through an adjusting entry; that expense is later closed. The remaining prepaid balance continues as an asset and is never closed. Closing the asset itself would eliminate a real future economic benefit from the balance sheet.

31. Closing entries help ensure comparability of income statements across successive periods. Answer: True By zeroing temporary accounts each period, closing entries guarantee that each income statement reflects only the revenues and expenses of its own period. Without closing, balances would accumulate across periods and destroy inter-period comparability. This support for comparability is a direct consequence of applying the periodicity assumption through the closing process.

32. A debit balance in Income Summary after closing revenues and expenses is closed by crediting Retained Earnings. Answer: False A debit balance represents a net loss. It is closed by debiting Retained Earnings (to reduce equity) and crediting Income Summary (to zero the clearing account). Crediting Retained Earnings would incorrectly increase equity when a loss has occurred. Direction of the entry must match the nature of the balance in Income Summary.

33. All business entities that prepare periodic financial statements perform closing entries. Answer: True Corporations, partnerships, sole proprietorships, and most nonprofits that report periodic performance must close temporary accounts so that each reporting period starts with zero balances in revenue, expense, and distribution accounts. The names of the equity accounts differ, but the mechanical necessity of the closing process is universal under the periodicity assumption.

34. The account “Sales Returns and Allowances” is closed as part of the revenue-closing process. Answer: True Sales Returns and Allowances is a temporary contra-revenue account. It is closed by debiting Income Summary (or by a compound entry that nets it against Sales Revenue) and crediting the contra-revenue account. This removes the contra balance so that net sales for the next period can be measured cleanly from a zero starting point.

35. Closing entries change the total assets reported on the balance sheet. Answer: False Closing entries affect only equity accounts. Assets and liabilities remain unchanged by the closing process itself; their balances were already finalized by the original transactions and adjusting entries. The balance sheet totals for assets are therefore identical before and after closing; only the composition of equity (specifically Retained Earnings) is updated.

36. Income Summary is closed before the Dividends account in the normal sequence. Answer: True Income Summary must be closed to Retained Earnings first so that the equity account reflects the period’s earnings. Only after that is the Dividends account closed, reducing Retained Earnings for distributions. Reversing this order would deduct dividends before earnings have been added, producing a less transparent and potentially confusing equity update.

37. A company can choose not to use an Income Summary account and close revenues and expenses directly to Retained Earnings. Answer: True Some computerized systems and some manual systems close revenues and expenses directly to Retained Earnings without an intermediate Income Summary account. The net effect on equity is identical. Income Summary is a convenience that makes the calculation of net income visible in the ledger; it is not an absolute requirement of the closing process.

38. The post-closing trial balance proves that net income was calculated correctly. Answer: False Net income is calculated and reported on the income statement before closing entries are made. The post-closing trial balance contains no revenue or expense accounts and therefore cannot verify the income figure. It only confirms that temporary accounts have been zeroed and that the remaining permanent accounts are in balance.

39. Gain on Sale of Equipment is closed through the Income Summary account. Answer: True Gains are temporary accounts that increase net income. They are closed by debiting the gain account and crediting Income Summary, exactly like ordinary revenue accounts. This ensures that the gain is included in the net-income figure transferred to Retained Earnings and that the temporary gain account begins the next period at zero.

40. Closing entries are required only for companies that use accrual-basis accounting. Answer: False Any entity that prepares periodic financial statements—whether on the accrual or cash basis—must close temporary accounts if it wishes to measure performance for discrete periods. Cash-basis entities still have revenue and expense accounts that accumulate during the period and must be cleared so that the next period starts fresh. The need for closing arises from periodicity, not from the choice of accrual versus cash.

41. After closing, the balance in the Income Summary account is equal to the period’s net income. Answer: False After the final closing entry that transfers its balance to Retained Earnings, Income Summary has a zero balance. During the closing process it temporarily holds the net-income (or net-loss) figure, but that balance is immediately closed out. At the end of the process the account is empty and ready to be used again in the subsequent period.

42. Owner’s Capital is a temporary account that is closed each period. Answer: False Owner’s Capital is a permanent equity account. Its balance carries forward and is updated by the closing of net income (or loss) and by the closing of the Drawing account. Treating Capital as temporary would erase the owner’s cumulative investment and accumulated earnings, destroying the continuous equity record required by the accounting equation.

43. The matching principle is supported by the closing process because temporary accounts are cleared for the next period. Answer: True After revenues and expenses have been matched on the income statement, closing entries remove those amounts from the accounts so that the next period’s matching process starts with clean temporary accounts. This prevents prior-period items from mixing with current-period items and thereby reinforces the integrity of the matching principle across successive reporting periods.

44. If revenues are $80,000 and expenses are $95,000, the closing entry for Income Summary debits Retained Earnings $15,000. Answer: True The $15,000 excess of expenses over revenues produces a debit balance (net loss) in Income Summary. Closing that balance requires a debit to Retained Earnings of $15,000 and a credit to Income Summary of $15,000. This correctly reduces equity for the loss incurred during the period.

45. Notes Payable is closed at year-end because it is a temporary account. Answer: False Notes Payable is a permanent liability account. Its balance represents an ongoing obligation and carries forward until the note is paid or refinanced. Only temporary accounts are closed. Closing a liability would incorrectly remove a real claim against the entity’s assets from the balance sheet.

46. The first closing entry typically closes all revenue accounts. Answer: True Standard practice begins by debiting each revenue account (and credit-balance temporary accounts such as gains) and crediting Income Summary for the total. This step brings all revenue into the clearing account so that, when expenses are subsequently closed, the difference clearly represents net income or net loss.

47. Closing entries can be prepared before adjusting entries if the accountant is in a hurry. Answer: False Adjusting entries must precede closing entries. Adjustments update the temporary accounts for accruals, deferrals, and estimates so that the income statement and the subsequent closing process reflect complete and accurate period results. Closing unadjusted balances would transfer incomplete information into equity and produce misstated financial statements.

48. A credit to the Dividends account is used when that account is closed. Answer: True The Dividends account carries a debit balance. To zero it, the account is credited and Retained Earnings is debited. The credit entry eliminates the temporary balance; the corresponding debit reduces permanent equity for the distribution. Reversing the debits and credits would increase both accounts incorrectly.

49. The accounting cycle ends with the preparation of the post-closing trial balance. Answer: True After transactions have been journalized and posted, the unadjusted trial balance prepared, adjusting entries made, the adjusted trial balance prepared, financial statements completed, and closing entries journalized and posted, the final step is the post-closing trial balance. It confirms that the permanent accounts are in balance and that the ledger is ready for the next accounting period, thereby completing the cycle.

50. Closing entries are optional if the company prepares a worksheet. Answer: False A worksheet is only a planning and working tool. Even when a worksheet is used, the closing entries must still be formally recorded in the journal and posted to the ledger so that the accounts themselves are updated. Omitting the formal entries leaves temporary accounts with balances, making the ledger incorrect for the subsequent period regardless of what the worksheet shows.

Closing Entries True/False Quiz: 50 Comprehensive Practice Questions

•Answer: False

•Detailed Explanation: The closing process is a mandatory procedural step in double-entry bookkeeping required under all recognized accounting frameworks, including US GAAP and IFRS. Without closing temporary accounts, general ledgers would accumulate continuous multi-period revenues and expenses, making periodic financial reporting impossible. Every accrual-based accounting system requires closing entries to reset nominal accounts and update permanent capital.

Question 13

Statement: After closing entries are posted, all temporary accounts will have a zero balance.

•Detailed Explanation: For a corporation, the closing process typically consists of four steps: (1) close revenues to Income Summary, (2) close expenses to Income Summary, (3) close Income Summary to Retained Earnings, and (4) close Dividends to Retained Earnings. Therefore, transferring Income Summary is the third step, while closing Dividends is the final, fourth step of the closing sequence.

1. Closing entries are made at the beginning of each accounting period.

Answer: False
Comment: Closing entries are made at theend of the accounting period, not the beginning. Their purpose is to finalize the books for the period just completed by resetting temporary accounts to zero. This process allows the new period to start with clean balances for revenue, expense, and dividend accounts. Making them at the beginning would be illogical because the accounts already have zero balances at that point.

2. The purpose of closing entries is to transfer balances from temporary accounts to permanent accounts.

Answer: True
Comment: This is the core definition of closing entries. Temporary accounts (revenues, expenses, dividends) are closed to permanent accounts (Retained Earnings or Owner’s Capital). This transfer updates the equity balance to reflect the period’s net income or loss and distributions. Without this transfer, temporary accounts would continue to grow indefinitely, making it impossible to measure periodic performance accurately.

3. Revenue accounts are closed by debiting them and crediting Income Summary.

Answer: True
Comment: This is the correct journal entry for closing revenue accounts. Since revenue accounts have a normal credit balance, they must be debited to reduce them to zero. The offsetting credit goes to Income Summary, which accumulates all revenues for the period. This is the first step in the closing process and ensures that revenues are properly aggregated before calculating net income.

4. Expense accounts are closed by crediting them and debiting Income Summary.

Answer: True
Comment: Expense accounts have a normal debit balance, so they are credited to zero them out. The offsetting debit goes to Income Summary, which accumulates all expenses. This is the second step in the closing process. After this entry, the balance in Income Summary represents the difference between total revenues and total expenses—the net income or net loss for the period.

5. The Dividends account is closed to Income Summary.

Answer: False
Comment: The Dividends account isnot closed to Income Summary. Dividends are distributions to shareholders and are not expenses; they do not affect net income. Instead, Dividends are closed directly to Retained Earnings (or Owner’s Capital in sole proprietorships). This entry debits Retained Earnings and credits Dividends, reducing equity by the amount of dividends declared during the period.

6. Income Summary is a permanent account that appears on the balance sheet.

Answer: False
Comment: Income Summary is atemporary account used only during the closing process. It never appears on any financial statement because its sole purpose is to facilitate the transfer of revenues and expenses to Retained Earnings. After the closing process is complete, Income Summary should have a zero balance. It is purely an internal clearing account with no existence outside the closing procedure.

7. After closing entries are posted, all temporary accounts should have a zero balance.

Answer: True
Comment: This is the fundamental objective of closing entries. Revenues, expenses, and dividends are all temporary accounts that must be reset to zero at the end of each period. This zero balance ensures that these accounts only reflect activity from the current period and are ready to accumulate new data for the upcoming period. The post-closing trial balance verifies this condition.

8. The post-closing trial balance includes only permanent accounts.

Answer: True
Comment: After all closing entries have been posted, the only accounts with balances are permanent accounts—assets, liabilities, and equity accounts (such as Retained Earnings and Common Stock). All temporary accounts (revenues, expenses, dividends) have been closed to zero. The post-closing trial balance serves as a final check that the books are in balance and ready for the next accounting period.

9. Closing entries are optional for companies that use the cash basis of accounting.

Answer: True
Comment: Companies using the cash basis of accounting do not typically prepare closing entries because they do not accrue revenues or expenses. Cash basis accounting recognizes transactions only when cash changes hands, so there are no temporary accounts to close in the same sense. However, most publicly traded companies use the accrual basis, making closing entries mandatory.

10. A net loss results in a credit to Retained Earnings during the closing process.

Answer: False
Comment: A net loss results in adebit to Retained Earnings, not a credit. When expenses exceed revenues, Income Summary has a debit balance. To close it, you credit Income Summary and debit Retained Earnings. This debit reduces Retained Earnings, reflecting the decrease in owner’s equity due to unprofitable operations. A credit to Retained Earnings would indicate net income, not a loss.

11. The Income Summary account is credited when closing revenue accounts.

Answer: True
Comment: When closing revenue accounts, each revenue account is debited, and Income Summary is credited. This increases the credit balance of Income Summary by the total amount of revenues. This accumulation is necessary before comparing revenues to expenses. After all revenues are closed, Income Summary holds a credit balance equal to total revenues, assuming no expenses have yet been closed.

12. The Income Summary account is debited when closing expense accounts.

Answer: True
Comment: When closing expense accounts, Income Summary is debited, and each expense account is credited. This increases the debit balance of Income Summary by total expenses. After this step, Income Summary contains both total revenues (credits) and total expenses (debits). The net difference determines whether the company has earned a profit or incurred a loss for the period.

13. Closing entries affect cash accounts.

Answer: False
Comment: Closing entries never affect cash or any other asset or liability account. They only affect temporary accounts (revenues, expenses, dividends) and the permanent equity account (Retained Earnings). Cash is a real account that carries its balance forward and is updated through actual transactions, not through the closing process. This is a common misconception among accounting beginners.

14. The closing process is the same for sole proprietorships and corporations.

Answer: False
Comment: While the closing process is similar, there is a key difference: corporations close the Dividends account to Retained Earnings, while sole proprietorships close the Owner’s Drawing account to Owner’s Capital. The mechanics of closing revenues and expenses to Income Summary are identical, but the final equity account name and the handling of distributions differ based on the business structure.

15. All expense accounts are closed in a single compound entry.

Answer: True
Comment: It is common practice to close all expense accounts in one compound journal entry. This entry debits Income Summary for the total amount of all expenses and credits each individual expense account for its respective balance. This approach is efficient and reduces the number of entries. However, some accountants prefer separate entries for clarity, but the net effect is identical.

16. The Dividends account has a normal credit balance.

Answer: False
Comment: The Dividends account has a normaldebit balance because it represents a reduction in retained earnings. Dividends are distributions of profits to shareholders, and they decrease equity. When dividends are declared, the Dividends account is debited. At the end of the period, it is closed with a credit to bring it to zero, and the offsetting debit goes to Retained Earnings.

17. Closing entries are recorded in the general journal before adjusting entries.

Answer: False
Comment: Closing entries are recordedafter adjusting entries and after the financial statements have been prepared. The correct order is: (1) journalize and post adjusting entries, (2) prepare the adjusted trial balance, (3) prepare financial statements, and (4) journalize and post closing entries. This sequence ensures that all adjustments are reflected in the financial statements before the books are closed.

18. A credit balance in Income Summary indicates a net loss.

Answer: False
Comment: A credit balance in Income Summary indicatesnet income, not a net loss. Since revenues are credited to Income Summary and expenses are debited to it, a credit balance means that total revenues exceed total expenses. A debit balance, on the other hand, would indicate a net loss. This distinction is critical for understanding the profitability of the period.

19. The post-closing trial balance verifies that total debits equal total credits after closing.

Answer: True
Comment: This is the primary purpose of the post-closing trial balance. It ensures that the accounting equation (Assets = Liabilities + Equity) remains in balance after all closing entries have been posted. It also confirms that all temporary accounts have been properly closed to zero. If debits do not equal credits, an error exists in the closing process that must be investigated and corrected.

20. Closing entries are necessary even if the company had no revenue during the period.

Answer: True
Comment: Even if a company had no revenue, it must still close any expense accounts and dividends to prepare the books for the next period. The closing process is mandatory regardless of profitability. If expenses were incurred, they must be closed to Income Summary, and the resulting net loss would then be closed to Retained Earnings. Skipping closing entries would leave temporary accounts with balances.

21. The Income Summary account is always closed with a credit to Retained Earnings.

Answer: False
Comment: Income Summary is closed with a credit to Retained Earningsonly when there is net income (credit balance in Income Summary). If there is a net loss (debit balance), the entry is reversed: Retained Earnings is debited and Income Summary is credited. The direction of the entry depends entirely on whether the company earned a profit or suffered a loss.

22. Permanent accounts are also called nominal accounts.

Answer: False
Comment: This statement is incorrect because permanent accounts are calledreal accounts, not nominal accounts. Temporary accounts (revenues, expenses, dividends) are referred to asnominal accounts. The distinction is important: real accounts carry balances forward to future periods, while nominal accounts are reset to zero at the end of each period through the closing process.

23. Closing entries are only made at the end of the fiscal year.

Answer: False
Comment: Closing entries can be made at the end of any accounting period, whether monthly, quarterly, or annually. However, they arerequired at least annually to prepare the books for the new fiscal year. Many companies that prepare monthly financial statements also perform monthly closing to ensure accurate interim reporting. The frequency depends on the company’s reporting needs.

24. Revenue accounts are increased by debits.

Answer: False
Comment: Revenue accounts are increased bycredits, not debits. This is because revenues increase owner’s equity, and equity accounts have a normal credit balance. When revenue is earned, the revenue account is credited. Therefore, to close a revenue account (to bring it to zero), it must be debited. Understanding normal balances is essential for correctly recording closing entries.

25. Expense accounts are increased by credits.

Answer: False
Comment: Expense accounts are increased bydebits, not credits. Expenses decrease owner’s equity, so they have a normal debit balance. When an expense is incurred, the expense account is debited. Therefore, to close an expense account, it must be credited. This is the opposite of revenue accounts and is a common source of confusion for students learning the closing process.

26. The closing entry for Dividends is a debit to Dividends and a credit to Retained Earnings.

Answer: False
Comment: This entry is reversed. To close Dividends, youdebit Retained Earnings andcredit Dividends. The credit to Dividends zeroes out the account, while the debit to Retained Earnings reduces equity. Dividends are a distribution of profits, so they decrease retained earnings. The incorrect entry would actually increase retained earnings, which is wrong.

27. The closing process updates the balance of Retained Earnings to reflect the current period’s results.

Answer: True
Comment: This is one of the essential functions of closing entries. By transferring net income (or net loss) and dividends to Retained Earnings, the account is updated to reflect the cumulative effect of the period’s operations and distributions. This ensures that the balance sheet accurately reports the owner’s claim on assets at the end of the period.

28. A company with a net income will have a debit balance in Income Summary before closing it.

Answer: False
Comment: A company with net income will have acredit balance in Income Summary before closing it. This is because total revenues (credits to Income Summary) exceed total expenses (debits to Income Summary). A debit balance would indicate a net loss. The credit balance equals the net income, which is then transferred to Retained Earnings with a debit to Income Summary.

29. Closing entries are not posted to the general ledger.

Answer: False
Comment: Closing entries are first recorded in the general journal and then posted to the general ledger accounts, just like any other journal entry. Posting updates the individual account balances—zeroing out temporary accounts and adjusting Retained Earnings. Without posting, the ledger would not reflect the closing process, and the accounts would not be ready for the next period.

30. The balance of the Service Revenue account after closing will be zero.

Answer: True
Comment: Service Revenue is a temporary account, and all temporary accounts are closed to zero at the end of the period. The closing entry for Service Revenue debits the account for its full balance and credits Income Summary. After this entry is posted, the Service Revenue account will have a zero balance and is ready to accumulate revenue earned in the next accounting period.

31. The Income Summary account is used to calculate net income or net loss.

Answer: True
Comment: Income Summary is specifically designed as a clearing account to facilitate the calculation of net income or net loss. After revenues and expenses are closed into it, its balance represents the difference between total revenues and total expenses. This balance is then closed to Retained Earnings. It simplifies the closing process by aggregating all income statement items in one account.

32. Closing entries are the same as adjusting entries.

Answer: False
Comment: Closing entries and adjusting entries serve entirely different purposes. Adjusting entries are made to ensure that revenues and expenses are recognized in the correct period (accrual accounting), and they affect both temporary and permanent accounts. Closing entries, on the other hand, are made to reset temporary accounts to zero and update equity. They are distinct steps in the accounting cycle.

33. The post-closing trial balance includes all balance sheet accounts.

Answer: True
Comment: The post-closing trial balance includes all permanent accounts, which are the balance sheet accounts: assets, liabilities, and equity accounts. It does not include any income statement accounts or dividends because those have been closed. This trial balance confirms that the accounting equation remains in balance and that the books are ready for the new period.

34. A net loss decreases Retained Earnings.

Answer: True
Comment: A net loss reduces Retained Earnings because the company’s expenses exceeded its revenues. The closing entry for a net loss involves a debit to Retained Earnings and a credit to Income Summary. This debit lowers the retained earnings balance, reflecting the decrease in owner’s equity. This is consistent with the principle that losses reduce the ownership claim on assets.

35. Dividends are considered an expense and are closed to Income Summary.

Answer: False
Comment: Dividends arenot expenses; they are distributions of profits to shareholders. Expenses are costs incurred to generate revenue, while dividends are a return of capital to owners. Therefore, dividends are never closed to Income Summary; they are closed directly to Retained Earnings. Treating dividends as expenses would understate net income and misrepresent the company’s performance.

36. The closing process ensures that the company’s assets are correctly valued.

Answer: False
Comment: The closing process does not affect asset valuation. Asset accounts are permanent and are updated through regular transactions, not through closing entries. Closing entries only affect temporary accounts and retained earnings. Asset valuation is handled through adjusting entries, depreciation, and impairment assessments, not through the closing process.

37. All temporary accounts are closed to the same Income Summary account.

Answer: True
Comment: All revenue and expense accounts are closed to the single Income Summary account. This centralization allows the company to calculate net income or loss in one place. After all revenues and expenses are accumulated in Income Summary, the net balance is then transferred to Retained Earnings. This streamlined approach is efficient and reduces the complexity of the closing process.

38. The closing entry for expenses includes a debit to each expense account.

Answer: False
Comment: The closing entry for expenses includes acredit to each expense account, not a debit. Since expense accounts have a normal debit balance, they must be credited to bring them to zero. The debit goes to Income Summary. This is a common error; many students incorrectly assume that debiting is always the closing action for expenses.

39. A company can skip closing entries if it is a small business.

Answer: False
Comment: Closing entries are not optional based on business size. Any company that uses the accrual basis of accounting and prepares formal financial statements must perform closing entries. Small businesses that use cash basis accounting may not need them, but if they follow GAAP or IFRS, closing entries are mandatory regardless of size. Skipping them would lead to inaccurate financial reporting.

40. The closing entry for Service Revenue increases Retained Earnings indirectly.

Answer: True
Comment: Closing Service Revenue to Income Summary, and then closing Income Summary to Retained Earnings, ultimately increases Retained Earnings by the amount of revenue (assuming no offsetting expenses). This indirect increase reflects the fact that revenues grow equity. While the direct entry does not touch Retained Earnings, the net effect of the closing process is to raise retained earnings when revenues exceed expenses.

41. The Dividends account is a permanent account.

Answer: False
Comment: The Dividends account is atemporary account because it is closed at the end of each period. Its balance does not carry forward; instead, it is reset to zero. Dividends are not an expense but a distribution of profits, and they are closed directly to Retained Earnings. The fact that it is closed makes it temporary, despite being related to equity.

42. After closing, the balance of the Rent Expense account will equal the total rent paid during the period.

Answer: False
Comment: After closing, the Rent Expense account will have a balance ofzero, not the total rent paid. The closing entry credits Rent Expense to zero it out. The total rent paid is recorded in the account during the period, but the closing process resets the balance to zero so that the account can accumulate next period’s rent expenses separately.

43. The closing process is performed after the post-closing trial balance.

Answer: False
Comment: The closing process is performedbefore the post-closing trial balance. The post-closing trial balance is preparedafter closing entries have been posted to verify that only permanent accounts remain and that debits equal credits. It is the final step in the accounting cycle, serving as a check that the closing process was completed correctly.

44. Retained Earnings is a temporary account that is closed each period.

Answer: False
Comment: Retained Earnings is apermanent account that carries its balance forward from period to period. It is not closed; rather, it is updated through the closing process. The balance in Retained Earnings accumulates over the life of the company, representing all prior years’ net income minus all prior dividends. It is a key component of shareholders’ equity on the balance sheet.

45. Closing entries are only necessary if the company has net income.

Answer: False
Comment: Closing entries are necessary regardless of whether the company has net income, net loss, or breaks even. The process must be completed to reset temporary accounts to zero and update Retained Earnings. Even if revenues exactly equal expenses (resulting in a zero balance in Income Summary), the closing entries are still required to close the individual revenue and expense accounts.

46. The entry to close Income Summary with a credit balance involves a credit to Retained Earnings.

Answer: True
Comment: When Income Summary has a credit balance (net income), it is closed with a debit to Income Summary and a credit to Retained Earnings. The credit to Retained Earnings increases equity. This entry completes the transfer of the period’s net income into the permanent equity account, ensuring that the income statement accounts are reset for the next period.

47. Temporary accounts are also called nominal accounts.

Answer: True
Comment: Temporary accounts are indeed referred to asnominal accounts in accounting terminology. These include all revenue accounts, expense accounts, and the dividends/drawing account. They are called “nominal” because they are nominal in nature—they relate to a specific period and are not cumulative. In contrast, permanent accounts are called “real accounts.”

48. Closing entries are made to the accounts in the general ledger.

Answer: True
Comment: Closing entries are journalized in the general journal and then posted to the general ledger. The posting step updates the individual ledger accounts—reducing revenue and expense accounts to zero and updating Retained Earnings. The general ledger is the central repository of all account balances, and closing entries must be recorded there to complete the accounting cycle.

49. The post-closing trial balance is prepared before the financial statements.

Answer: False
Comment: The post-closing trial balance is preparedafter the financial statements. The sequence is: adjusted trial balance → financial statements → closing entries → post-closing trial balance. The post-closing trial balance verifies that the closing process was correct. It is not used to prepare financial statements because the statements are completed before closing.

50. Closing entries are required under both GAAP and IFRS.

Answer: True
Comment: Both U.S. GAAP (Generally Accepted Accounting Principles) and IFRS (International Financial Reporting Standards) require the closing of temporary accounts at the end of each reporting period. This requirement ensures consistency in financial reporting and allows for comparability across periods. The specific mechanics of closing may vary in detail, but the fundamental process is a standard practice under both frameworks.

1. The primary purpose of closing entries is to zero out permanent accounts.

Answer: FalseExplanation: Closing entries are specifically designed to zero outtemporary accounts, such as revenues, expenses, and dividends. Permanent accounts, which include assets, liabilities, and equity, are never closed; instead, their balances carry forward into the next accounting period. The goal of closing temporary accounts is to reset them to zero so they can accurately track financial performance for the new upcoming period, while updating the permanent Retained Earnings account.

2. Temporary accounts are also known as nominal accounts.

Answer: TrueExplanation: In accounting terminology, temporary accounts are frequently referred to as nominal accounts. These include all income statement accounts (revenues and expenses) as well as the dividends or drawing accounts. They are called temporary because their balances are only maintained for a single accounting period. At the end of the period, they are closed out to equity, ensuring that the financial results of one period do not mix with the results of the next.

3. The post-closing trial balance contains only temporary accounts.

Answer: FalseExplanation: The post-closing trial balance containsonly permanent accounts (assets, liabilities, and equity). Because all temporary accounts have been completely zeroed out during the closing process, they no longer have balances to report. This final trial balance is prepared specifically to verify that the general ledger is in perfect balance regarding the permanent accounts that will carry forward into the next fiscal year.

4. Closing entries are prepared before adjusting entries.

Answer: FalseExplanation: Adjusting entries must always be recorded and posted before closing entries. Adjusting entries ensure that revenues and expenses are recognized in the correct period according to the accrual basis of accounting. Only after these adjustments are made can the company prepare an adjusted trial balance, which provides the accurate, final revenue and expense figures required to journalize the closing entries properly.

5. The Income Summary account appears on the income statement.

Answer: FalseExplanation: The Income Summary account is a temporary clearing account used exclusively during the closing process behind the scenes. It is never reported on any formal financial statement, including the income statement or the balance sheet. Its sole purpose is to act as a holding account to aggregate revenues and expenses before transferring the final net income or loss to Retained Earnings.

6. Asset, liability, and equity accounts are considered permanent accounts.

Answer: TrueExplanation: Permanent accounts, also known as real accounts, make up the balance sheet. This includes all asset, liability, and equity accounts. Unlike temporary accounts, their balances are not reset to zero at the end of the accounting period. Instead, the ending balance of one period automatically becomes the beginning balance of the next, continuously tracking the company’s cumulative financial position over its entire lifespan.

7. If closing entries are not made, the revenue accounts will carry their balances into the next period.

Answer: TrueExplanation: If an accountant fails to execute closing entries, the credit balances in the revenue accounts will not be zeroed out. These balances will incorrectly roll forward into the new accounting period. When new revenues are earned in the next year, they will be added to the old balances, causing the subsequent year’s total revenues and net income to be severely overstated and completely misleading.

8. The Dividends account is closed to the Income Summary account.

Answer: FalseExplanation: The Dividends account represents a distribution of corporate earnings to shareholders, not an operational expense incurred to generate revenue. Therefore, it does not affect the calculation of net income and completely bypasses the Income Summary account. Instead, the Dividends account is closed directly to Retained Earnings to accurately reflect the reduction in the owners’ equity caused by the cash payouts.

9. A post-closing trial balance is prepared to prove the equality of the permanent account balances.

Answer: TrueExplanation: The primary objective of the post-closing trial balance is to verify that total debits equal total credits for all permanent accounts after the closing process is complete. Since all temporary accounts now have zero balances, this report ensures that the ledger is mathematically accurate and perfectly balanced. This final verification step guarantees that the accounting system is completely ready to record transactions for the new period.

10. Closing entries affect the total assets reported on the balance sheet.

Answer: FalseExplanation: Closing entries are internal, non-cash bookkeeping adjustments that only involve temporary income statement accounts, the Income Summary, and Retained Earnings. They do not involve any asset, liability, or contra-asset accounts. Because no cash, receivables, inventory, or equipment accounts are touched during this process, the company’s total assets remain completely unchanged by the mere act of closing the books.

11. The first step in the closing process is to close all expense accounts to Income Summary.

Answer: FalseExplanation: The standard accounting cycle dictates that the first step in the closing process is to close allrevenue accounts to the Income Summary account. Because revenues normally carry credit balances, they are debited to reduce them to zero, while the Income Summary is credited. Only after revenues are closed does the accountant proceed to the second step, which is closing the expense accounts.

12. To close a revenue account, you must debit the revenue account and credit Income Summary.

Answer: TrueExplanation: Revenue accounts normally carry credit balances. To reduce a revenue account to zero at the end of the period, the accountant must apply a debit entry to the revenue account. The offsetting credit is made to the Income Summary account. This journal entry successfully removes the revenue from the temporary ledger and aggregates it into the clearing account to help determine the final net income.

13. Expense accounts are closed by debiting Income Summary and crediting the individual expense accounts.

Answer: TrueExplanation: Expense accounts normally maintain debit balances. To zero them out at period-end, the accountant must credit each individual expense account. The total of these credits is offset by a single debit to the Income Summary account. This entry effectively transfers the total cost of operations out of the income statement accounts and into the clearing account to calculate the period’s net income accurately.

14. If the Income Summary has a credit balance after closing revenues and expenses, the company incurred a net loss.

Answer: FalseExplanation: A credit balance in the Income Summary indicates that total credits (revenues) exceeded total debits (expenses) during the period. In accounting, when revenues are greater than expenses, the company has generated a net income, not a loss. This credit balance will eventually be closed by debiting Income Summary and crediting Retained Earnings, thereby increasing the company’s total stockholders’ equity.

15. When closing a net income to Retained Earnings, Retained Earnings is debited.

Answer: FalseExplanation: When a company generates a net income, the Income Summary account holds a credit balance. To close it, you must debit Income Summary to bring it to zero. The offsetting entry is acredit to Retained Earnings. Crediting Retained Earnings increases the equity account, properly reflecting the fact that the company’s profits have been added to the owners’ residual interest in the business.

16. The Dividends account is closed directly to Retained Earnings by debiting Retained Earnings and crediting Dividends.

Answer: TrueExplanation: Because dividends represent a return of capital to shareholders rather than an expense, they bypass the Income Summary. The Dividends account normally carries a debit balance. To close it, the accountant credits the Dividends account to zero it out and debits Retained Earnings. This journal entry directly decreases the retained earnings balance, reflecting the cash or assets paid out to investors during the period.

17. Sales Returns and Allowances is a contra-revenue account and is closed by crediting it and debiting Income Summary.

Answer: TrueExplanation: Sales Returns and Allowances is a contra-revenue account, meaning it carries a normal debit balance that offsets gross sales. During the closing process, it is treated similarly to an expense. To close it, the accountant credits the account to bring it to zero and debits the Income Summary account. This correctly reduces the gross revenues transferred into the clearing account to calculate accurate net income.

18. The Income Summary account is a permanent equity account.

Answer: FalseExplanation: The Income Summary is a unique, temporary clearing account used exclusively during the closing process. It is never classified as a permanent account, nor does it appear on the balance sheet as an equity account. Its balance is always reduced to zero at the end of the closing process once the net income or loss has been successfully transferred to the permanent Retained Earnings account.

19. The Income Summary account is reported on the company’s balance sheet at the end of the year.

Answer: FalseExplanation: The Income Summary account is never reported on any formal financial statement, including the balance sheet. It exists solely in the general ledger as a temporary mathematical tool to facilitate the closing process. Once the closing entries are posted, the Income Summary account has a zero balance and plays no role in the company’s external financial reporting or balance sheet presentation.

20. Closing entries are journalized and posted before the financial statements are prepared.

Answer: FalseExplanation: The accounting cycle dictates a strict sequence. Financial statements (Income Statement, Statement of Retained Earnings, and Balance Sheet) must be preparedbefore closing entries are journalized. The financial statements require the un-closed balances of revenues and expenses to calculate net income. Only after these statements are generated can the accountant use the verified net income figure to accurately record the closing entries.

21. Accumulated Depreciation is a temporary account that must be closed at the end of the year.

Answer: FalseExplanation: Accumulated Depreciation is a contra-asset account that reduces the book value of fixed assets on the balance sheet. Because it is a permanent account, its cumulative balance carries forward to the next accounting period and is never closed. Only the periodic Depreciation Expense account, which appears on the income statement, is closed to the Income Summary at the end of the period.

22. Unearned Revenue is a liability account and is not closed during the closing process.

Answer: TrueExplanation: Unearned Revenue represents cash received in advance for goods or services not yet delivered, making it a liability on the balance sheet. As a permanent account, its unearned balance carries forward into the next accounting period until the revenue is actually earned. Therefore, it is completely excluded from the closing process, which only targets temporary income statement accounts.

23. Prepaid Insurance is an asset account and its balance is closed to Income Summary.

Answer: FalseExplanation: Prepaid Insurance represents future economic benefits paid for in advance, classifying it as a current asset on the balance sheet. As a permanent account, its unexpired balance carries forward into the next period and is never closed. Only the portion that has expired during the period is recorded as Insurance Expense via an adjusting entry, and only that specific expense account is closed.

24. If a company fails to close its expense accounts, the net income for the following year will be overstated.

Answer: FalseExplanation: Expense accounts normally carry debit balances. If they are not closed to zero, those debits will roll into the next period and add to the new year’s expenses. Higher recorded expenses in the subsequent period will result in a lower, orunderstated, net income for that year. Additionally, the current year’s Retained Earnings will remain incorrect because the net income was never transferred.

25. The balance of the Retained Earnings account on the post-closing trial balance should match the ending balance on the Statement of Retained Earnings.

Answer: TrueExplanation: The entire purpose of the closing process is to update the Retained Earnings ledger to reflect the period’s net income and dividends. After closing entries are posted, the final updated ledger balance must perfectly match the ending Retained Earnings figure calculated on the Statement of Retained Earnings. This reconciliation proves that the closing process was executed accurately and the books are ready for the next period.

26. A debit balance in the Income Summary account before it is closed indicates that the company generated a net income.

Answer: FalseExplanation: A debit balance in the Income Summary means that total debits (expenses) exceeded total credits (revenues). When a company’s operating costs and expenses surpass the income it generates, it incurs a net loss, not a net income. This debit balance is closed by crediting Income Summary and debiting Retained Earnings, which ultimately reduces the overall stockholders’ equity on the balance sheet.

27. Interest Revenue is closed by debiting Interest Revenue and crediting Income Summary.

Answer: TrueExplanation: Interest Revenue is a temporary income statement account that normally carries a credit balance. To reduce this account to zero at period-end, the accountant must debit the Interest Revenue account. The corresponding credit is made to the Income Summary account. This entry successfully removes the revenue from the temporary ledger and aggregates it into the clearing account to help determine the final net income.

28. Cost of Goods Sold is an expense account and is closed to Income Summary.

Answer: TrueExplanation: Cost of Goods Sold (COGS) is a major expense account on the income statement representing the direct costs of producing goods. Like all other expense accounts, it carries a normal debit balance. During the closing process, COGS is credited to reduce its balance to zero, and the Income Summary account is debited, ensuring the cost is factored into the net income calculation.

29. Reversing entries are a mandatory step that must be performed immediately after closing entries.

Answer: FalseExplanation: Reversing entries are entirely optional and are not a required step in the standard accounting cycle. If a company chooses to use them to simplify future journal entries, they are recorded on thefirst day of the new accounting period, not immediately after closing entries at the end of the old period. They primarily deal with prior period accruals and deferrals.

30. The accounting equation (Assets = Liabilities + Equity) remains in balance after closing entries are posted.

Answer: TrueExplanation: Closing entries only transfer net income and dividends into Retained Earnings. While this alters the internal composition of the Equity section by updating the Retained Earnings balance, the overall accounting equation remains perfectly balanced. Total assets and total liabilities are completely untouched by closing entries. The change in equity simply reflects the mathematical reality of the period’s earnings, keeping the fundamental equation intact.

31. In a sole proprietorship, the Income Summary account is closed to the Owner’s Capital account.

Answer: TrueExplanation: Unlike corporations that use a Retained Earnings account, sole proprietorships track the owner’s equity in a single “Owner’s Capital” account. After revenues and expenses are aggregated in the Income Summary, the resulting net income or loss is transferred directly to the Owner’s Capital account. This updates the total equity to accurately reflect the business’s profitability and the owner’s residual claim for the period.

32. Owner’s Drawings in a sole proprietorship are closed to the Income Summary account.

Answer: FalseExplanation: Owner’s Drawings represent assets withdrawn by the owner for personal use, not an expense incurred to generate business revenue. Therefore, drawings do not affect the calculation of net income and bypass the Income Summary entirely. The Drawings account is closed directly to the Owner’s Capital account by crediting Drawings and debiting Capital, accurately reducing the owner’s total equity stake in the business.

33. In a partnership, the Income Summary account is closed by distributing the net income to the partners’ individual Capital accounts.

Answer: TrueExplanation: Partnerships maintain separate capital accounts for each partner. When the Income Summary account is closed at year-end, the net income or loss is not sent to a single corporate equity account. Instead, it is allocated and distributed to the individual partners’ Capital accounts according to the agreed-upon profit-and-loss sharing ratios defined in the formal partnership agreement.

34. The Allowance for Doubtful Accounts is closed to Bad Debt Expense at the end of the period.

Answer: FalseExplanation: The Allowance for Doubtful Accounts is a contra-asset account that reduces Accounts Receivable to its net realizable value on the balance sheet. Because it is a permanent balance sheet account, its cumulative balance carries forward to the next period and is never closed. Only the periodic Bad Debt Expense account, which appears on the income statement, is closed to the Income Summary at period-end.

35. Closing entries have a direct impact on the company’s operating cash flows for the period.

Answer: FalseExplanation: Closing entries are purely internal, non-cash bookkeeping adjustments designed to reset temporary accounts and update equity. No cash is exchanged, received, or paid out as a result of recording a closing entry. Even the closing of the Dividends account merely records the accounting reduction in equity; the actual cash outflow occurred previously when the dividend was originally declared and paid.

36. The adjusted trial balance is the primary source document used to prepare closing entries.

Answer: TrueExplanation: The adjusted trial balance is the critical document used to prepare closing entries. It lists all account balances after adjusting entries for accruals and deferrals have been posted. Because it contains the final, accurate figures for all temporary revenue and expense accounts, it provides the exact data needed to transfer these balances to the Income Summary and accurately calculate the final net income.

37. While a contra-asset account has a normal credit balance, it is closed just like a revenue account.

Answer: FalseExplanation: A contra-asset account, like Accumulated Depreciation, is a permanent balance sheet account. Even though it carries a normal credit balance similar to a revenue account, it is never closed at the end of the period. Its balance continuously rolls over to the next year to track the total historical depreciation of an asset. Only temporary income statement accounts are subject to the closing process.

38. Failing to close the Dividends account will result in an understatement of Retained Earnings on the balance sheet.

Answer: FalseExplanation: The Dividends account carries a normal debit balance because it reduces overall equity. If an accountant fails to close this account at year-end, the debit balance remains in the ledger. Consequently, the Retained Earnings account will not be reduced by the dividend payouts, causing the final Retained Earnings balance reported on the balance sheet to be materiallyoverstated, rather than understated.

39. The Retained Earnings ledger account is only updated during the closing process.

Answer: TrueExplanation: Throughout the accounting period, revenues and expenses are recorded in their respective temporary accounts, leaving the Retained Earnings ledger untouched. It is only during the final closing process that the net income or loss and the dividends are formally transferred into the Retained Earnings account. This ensures the ledger accurately reflects the cumulative, updated equity balance at the exact end of the fiscal period.

40. The preparation of the post-closing trial balance is the final mandatory step in the accounting cycle.

Answer: TrueExplanation: The preparation of the post-closing trial balance is the absolute final mandatory step in the standard accounting cycle. After adjusting entries, financial statements, and closing entries are completed and posted, this trial balance is generated to ensure that the general ledger is in perfect balance regarding permanent accounts. This guarantees the books are completely ready for the first day of the new fiscal period.

41. Depreciation Expense is closed to the Accumulated Depreciation account.

Answer: FalseExplanation: Depreciation Expense is an income statement account and must be closed to the Income Summary account, just like all other expenses. It is never closed directly to Accumulated Depreciation. Accumulated Depreciation is a permanent contra-asset account on the balance sheet that is updated via adjusting entries during the period, not through the closing process at the end of the period.

42. Rent Expense is closed by debiting Rent Expense and crediting Income Summary.

Answer: FalseExplanation: Rent Expense normally carries a debit balance. To reduce this account to zero at period-end, the accountant mustcredit the Rent Expense account. The offsetting debit is made to the Income Summary account. Debiting the expense account would incorrectly increase its balance rather than zeroing it out, violating the fundamental mechanics of the closing process.

43. If a temporary account has a zero balance at the end of the period, no closing entry is required for that account.

Answer: TrueExplanation: If a temporary revenue or expense account already has a zero balance at the end of the accounting period, no mathematical closing entry is required for that specific ledger. Attempting to close a zero balance would result in a redundant journal entry with zero debits and credits. The accountant can safely ignore it and proceed to the next account.

44. In accounting, the terms “real accounts” and “permanent accounts” refer to the exact same types of accounts.

Answer: TrueExplanation: In accounting terminology, the terms “real accounts” and “permanent accounts” are completely synonymous. Both refer to balance sheet accounts—specifically assets, liabilities, and equity—that maintain continuous, ongoing balances from one accounting period to the next. They are distinguished from “nominal” or “temporary” accounts, which are closed to zero at the end of every fiscal year.

45. Closing entries are necessary to update the Retained Earnings account to its correct ending balance.

Answer: TrueExplanation: The Retained Earnings ledger account remains static throughout the year while revenues and expenses accumulate in temporary accounts. Closing entries are the specific mechanical process required to transfer the period’s net income and dividend distributions into Retained Earnings. Without these entries, the Retained Earnings ledger would remain outdated and fail to match the correct ending balance reported on the formal financial statements.

46. When total expenses exceed total revenues, the closing entry to Income Summary will include a debit to Retained Earnings.

Answer: TrueExplanation: When total expenses exceed total revenues, the company incurs a net loss, leaving the Income Summary account with a debit balance. To close this account and bring it to zero, the accountant must credit Income Summary. The offsetting entry is a debit to Retained Earnings. This debit reduces the total retained earnings, correctly reflecting the economic loss suffered by the company during the period.

47. The Income Summary account is considered a temporary owner’s equity account.

Answer: TrueExplanation: The Income Summary account is technically classified as a temporary owner’s equity account (or temporary stockholders’ equity account in a corporation). It exists solely to facilitate the closing process by temporarily holding the net income or loss before it is permanently transferred to the main equity account, such as Retained Earnings or Owner’s Capital. It never appears on the formal balance sheet.

48. Sales Discounts are closed directly to the Sales Revenue account to calculate net sales.

Answer: FalseExplanation: Sales Discounts are treated as a contra-revenue account and are closed directly to the Income Summary account, not to the Sales Revenue account. During the closing process, Sales Discounts is credited to zero it out, and Income Summary is debited. The calculation of “Net Sales” is a presentation format used strictly on the face of the Income Statement, not a formal journal entry in the general ledger.

49. An accounting worksheet can be used to facilitate the preparation of closing entries.

Answer: TrueExplanation: An accounting worksheet is a highly useful, multi-column internal document used to organize and process accounting data. While it is not a formal financial statement, the worksheet contains an adjusted trial balance and dedicated columns for income statement and balance sheet data. These columns make it incredibly easy for accountants to identify which temporary accounts need to be closed and to draft the necessary closing entries accurately.

50. Once the post-closing trial balance is prepared, the company is ready to begin recording transactions for the next accounting period.

Answer: TrueExplanation: The post-closing trial balance serves as the official starting point for the new fiscal year. By verifying that all temporary accounts are zeroed out and all permanent accounts are in perfect mathematical balance, it guarantees that the general ledger is clean and accurate. Once this report is generated, the accounting cycle is officially complete, and the company can safely begin journalizing daily transactions for the new period.