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

• A. To record all outstanding liabilities at year-end
• B. To prepare the cash flow statement
• C. To adjust asset accounts to their fair market value
• D. To transfer the balances of temporary accounts to retained earnings

Answer: (D)

Verified step by step guidance

1. Understand the concept of temporary accounts: Temporary accounts include revenue, expense, and dividend accounts. These accounts are used to record transactions during a specific accounting period and are closed at the end of the period.
2. Recognize the purpose of the closing process: The primary goal of the closing process is to reset the balances of temporary accounts to zero for the next accounting period. This ensures that the financial results of one period do not carry over to the next.
3. Learn how balances are transferred: The balances of temporary accounts are transferred to a permanent account, typically retained earnings, which is part of the equity section of the balance sheet. This reflects the net income or loss and dividends for the period.
4. Understand the mechanics of closing entries: Closing entries are journal entries made at the end of an accounting period. For example, revenue accounts are debited, and retained earnings are credited; expense accounts are credited, and retained earnings are debited.
5. Recognize the importance of the closing process: By completing the closing process, the financial statements accurately reflect the company's performance for the period, and the accounts are prepared for the next accounting cycle.