Which of the following is the correct journal entry to close all expense accounts at the end of the accounting period?

• A. Debit Retained Earnings; Credit all Expense accounts
• B. Debit all Expense accounts; Credit Retained Earnings
• C. Debit Income Summary; Credit all Expense accounts
• D. Debit all Expense accounts; Credit Income Summary

Answer: (C)

Verified step by step guidance

1. Understand the purpose of closing entries: Closing entries are made at the end of an accounting period to transfer balances from temporary accounts (like revenue, expenses, and dividends) to permanent accounts (like Retained Earnings or Income Summary). This process resets the temporary accounts to zero for the next period.
2. Identify the accounts involved: Expense accounts are temporary accounts that need to be closed. The Income Summary account is used as an intermediary to collect the balances of all temporary accounts before transferring them to Retained Earnings.
3. Determine the correct journal entry: To close expense accounts, you need to debit the Income Summary account (to increase its balance) and credit all Expense accounts (to reduce their balances to zero). This reflects the transfer of expenses to the Income Summary account.
4. Write the journal entry: The journal entry to close expense accounts is: Debit Income Summary; Credit all Expense accounts. This ensures that the expense accounts are reset to zero and their balances are moved to the Income Summary account.
5. Understand the flow of closing entries: After closing the expense accounts, the Income Summary account will eventually be closed to Retained Earnings, completing the process of transferring all temporary account balances to the permanent equity account.