Which of the following is an objective for preparing closing entries?

• A. To reconcile the bank statement with the cash account
• B. To adjust asset and liability accounts to their fair values
• C. To transfer the balances of temporary accounts to retained earnings
• D. To record the purchase of long-term assets

Answer: (C)

Verified step by step guidance

1. Understand the purpose of closing entries: Closing entries are prepared at the end of an accounting period to transfer the balances of temporary accounts (such as revenues, expenses, and dividends) to permanent accounts (such as retained earnings). This ensures that temporary accounts start with a zero balance in the next accounting period.
2. Identify temporary accounts: Temporary accounts include revenue accounts, expense accounts, and dividend accounts. These accounts are used to track financial activity during a specific period and need to be closed to retained earnings.
3. Recognize the permanent account: Retained earnings is a permanent account that accumulates the net income or loss and dividends over time. Closing entries transfer the net effect of temporary accounts to retained earnings.
4. Prepare closing entries: For each temporary account, create a journal entry to transfer its balance to retained earnings. For example, debit revenue accounts and credit retained earnings, and credit expense accounts and debit retained earnings.
5. Verify the objective: The objective of preparing closing entries is to transfer the balances of temporary accounts to retained earnings, ensuring the accounting records are ready for the next period.