What is the primary goal of the closing process in financial accounting?

• A. To adjust asset accounts to their fair market value
• B. To record all outstanding invoices at year-end
• C. To prepare the company for an external audit
• D. To transfer the balances of temporary accounts to retained earnings

Answer: (D)

Verified step by step guidance

1. Understand the concept of the closing process: The closing process in financial accounting is performed at the end of an accounting period to reset temporary accounts (such as revenues, expenses, and dividends) to zero and transfer their balances to permanent accounts, specifically retained earnings.
2. Identify temporary accounts: Temporary accounts include revenue, expense, and dividend accounts. These accounts accumulate balances during the accounting period but need to be closed to start fresh in the next period.
3. Explain the purpose of transferring balances: The primary goal of the closing process is to ensure that the balances of temporary accounts are transferred to retained earnings, which is a permanent account. This reflects the net income or loss and dividends for the period in the equity section of the balance sheet.
4. Describe the mechanics of closing entries: Closing entries are journal entries made to transfer the balances of temporary accounts to retained earnings. For example, revenue accounts are debited, and retained earnings are credited; expense accounts are credited, and retained earnings are debited.
5. Highlight the importance of the closing process: The closing process ensures accurate financial reporting by resetting temporary accounts for the next accounting period and updating retained earnings to reflect the company's financial performance for the period.