In the closing process which account balances will be transferred to retained earnings?
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Which Accounts are Closed at Year End?At the end of a company's fiscal year, all temporary accounts should be closed. Temporary accounts accumulate balances for a single fiscal year and are then emptied. Conversely, permanent accounts accumulate balances on an ongoing basis through many fiscal years, and so are not closed at the end of the fiscal year. At the end of the fiscal year, closing entries are used to shift the entire balance in every temporary account into retained earnings, which is a permanent account. The net amount of the balances shifted constitutes the gain or loss that the company earned during the period. Once the year-end processing has been completed, all of the temporary accounts have been emptied and therefore "closed" for the current fiscal year. A flag in the accounting software is then set to close down the old fiscal year, which means that no one can enter transactions during that time period. Another flag can be set to open the next fiscal year, at which point the same temporary accounts are opened, now with zero balances, and are used to begin accumulating transactional information for the next fiscal year. Thus, the only accounts closed at year end are temporary accounts. Permanent accounts remain open at all times. Types of Temporary AccountsThe most common types of temporary accounts are for revenue, expenses, gains, and losses - essentially any account that appears in the income statement. In addition, the income summary account, which is an account used to summarize temporary account balances before shifting the net balance elsewhere, is also a temporary account. Examples of temporary accounts are revenue, cost of goods sold, rent expense, utilities expense, compensation expense, and benefits expense. Types of Permanent AccountsPermanent accounts are those that appear on the balance sheet, such as asset, liability, and equity accounts. Examples of permanent accounts are cash, marketable securities, accounts receivable, fixed assets, accounts payable, and common stock. From the course: Financial Accounting Part 1 Video is locked. “ - Once an income statement is prepared, how do the revenue and expense numbers in the accounts revert back to zero
so that the company's financial performance for the next period can be measured? Through a process involving closing entries, the income statement numbers are set at zero and the balances in those accounts are transferred to their permanent home, the retained earnings account. The dividends account is closed to retained earnings as well. Thus, the retained earnings account reflects the earnings that have been retained, net income less dividends, in the business. This closing process reflects the
fact that revenue, expense, and dividend accounts are simply subcategories of retained earnings. The revenue, expense, and dividend accounts are used to temporarily keep separate track of the many business events that impact retained earnings during the year. At the end of the year, the balances in those accounts are formally transferred to retained earnings. Caution, don't close… Contents
What happens to the retained earnings account in the closing process?Second, the closing process updates the retained earnings account to its correct end of period balance. Recall that the balance in the retained earnings comes from the statement of change in equity and not the adjusted trial balance.
Which account balances are transferred to retained earnings during the closing process?A closing entry is a journal entry made at the end of the accounting period. It involves shifting data from temporary accounts on the income statement to permanent accounts on the balance sheet. All income statement balances are eventually transferred to retained earnings.
What accounts should be closed to retained earnings?All Revenue and Expense accounts will need to be closed into Retained Earnings.
Which of the following accounts should be closed to retained earnings at the end of the fiscal year?Answer: b.
Income statement accounts such as revenues and expenses, including depreciation are all closed to the Income Summary account at the end of the fiscal year as part of the closing process.
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