Closing entries are used to:

Closing entries are used to:

• A. Set balances to 0 at year-end and transfer to Retained Earnings.
• B. Close only revenue accounts.
• C. Transfer balances to Income Summary only.
• D. Not affect Retained Earnings.

Answer: (A)

Closing entries reset temporary accounts to zero and reflect the period’s net result in Retained Earnings. Revenue and expense accounts are temporary and must be closed so the next period starts with zero balances. The difference between total revenues and total expenses—net income or net loss—flows into Retained Earnings, updating the company’s equity for the period. This is why the best choice describes both setting balances to zero at year-end and transferring the net result to Retained Earnings. In practice, you’ll often see revenues and expenses closed to Income Summary first, and then Income Summary closed to Retained Earnings, but the ultimate effect is to move the period’s net income (or loss) into Retained Earnings. Closing only revenue accounts would leave expenses open, and transferring exclusively to Income Summary without moving the result to Retained Earnings is incomplete; closing entries do affect Retained Earnings because they capture the net outcome of the period.

Closing entries reset temporary accounts to zero and reflect the period’s net result in Retained Earnings. Revenue and expense accounts are temporary and must be closed so the next period starts with zero balances. The difference between total revenues and total expenses—net income or net loss—flows into Retained Earnings, updating the company’s equity for the period. This is why the best choice describes both setting balances to zero at year-end and transferring the net result to Retained Earnings. In practice, you’ll often see revenues and expenses closed to Income Summary first, and then Income Summary closed to Retained Earnings, but the ultimate effect is to move the period’s net income (or loss) into Retained Earnings. Closing only revenue accounts would leave expenses open, and transferring exclusively to Income Summary without moving the result to Retained Earnings is incomplete; closing entries do affect Retained Earnings because they capture the net outcome of the period.