To which of the following accounts should the balance in the Income Summary account be closed at the end of the accounting period?

• A. Retained Earnings
• B. Common Stock
• C. Dividends
• D. Cash

Answer: (A)

Verified step by step guidance

1. Understand the purpose of the Income Summary account: It is a temporary account used during the closing process to summarize revenues and expenses for the period.
2. Recognize that at the end of the accounting period, the balance in the Income Summary account represents the net income or net loss for the period.
3. Determine where the net income or net loss should be transferred: In most cases, it is closed to the Retained Earnings account, as this account reflects the accumulated earnings of the company.
4. Note that Common Stock, Dividends, and Cash are not accounts where the Income Summary balance is closed. Common Stock represents ownership equity, Dividends are distributions to shareholders, and Cash is an asset account.
5. Conclude that the correct account to close the Income Summary balance to is Retained Earnings, as it aligns with the purpose of summarizing and transferring the period's net income or loss to the equity section of the balance sheet.