What is the primary purpose of closing entries in the accounting cycle?

• A. To transfer the balances of temporary accounts to retained earnings
• B. To record the purchase of new assets
• C. To prepare the financial statements for the next accounting period
• D. To adjust asset and liability accounts to their fair market value

Answer: (A)

Verified step by step guidance

1. Understand the concept of closing entries: Closing entries are journal entries made at the end of an accounting period to transfer the balances of temporary accounts (such as revenues, expenses, and dividends) to permanent accounts (like retained earnings). This process resets the temporary accounts to zero for the next accounting period.
2. Identify the purpose of closing entries: The primary purpose is to ensure that the temporary accounts do not carry over their balances into the next accounting period, allowing the company to start fresh with these accounts.
3. Analyze the options provided: Evaluate each option to determine which aligns with the purpose of closing entries. For example, transferring balances to retained earnings is directly related to closing entries, while recording asset purchases or adjusting accounts to fair market value are unrelated tasks.
4. Relate closing entries to the accounting cycle: Closing entries are part of the final steps in the accounting cycle, which includes preparing financial statements and resetting temporary accounts for the next period.
5. Conclude the correct answer: Based on the explanation, the correct answer is 'To transfer the balances of temporary accounts to retained earnings,' as this is the primary purpose of closing entries in the accounting cycle.