Which statement is correct regarding the closing process of a merchandiser?

• A. Permanent accounts such as Inventory are closed at the end of the period.
• B. Temporary accounts, including Sales, Sales Returns and Allowances, and Cost of Goods Sold, are closed to the Income Summary account.
• C. Only expense accounts are closed during the closing process.
• D. The closing process is not required for a merchandiser, only for service companies.

Answer: (B)

Verified step by step guidance

1. Understand the concept of the closing process: The closing process is a procedure performed at the end of an accounting period to transfer the balances of temporary accounts to permanent accounts. Temporary accounts include revenues, expenses, and dividends, while permanent accounts include assets, liabilities, and equity accounts.
2. Identify the temporary accounts for a merchandiser: Temporary accounts for a merchandiser include Sales, Sales Returns and Allowances, Cost of Goods Sold, and other revenue and expense accounts. These accounts are closed to prepare the books for the next accounting period.
3. Clarify the role of the Income Summary account: During the closing process, temporary accounts are closed to the Income Summary account. This account acts as a temporary holding account to summarize the net income or loss before transferring it to Retained Earnings.
4. Address the incorrect statements: Permanent accounts, such as Inventory, are not closed during the closing process. The closing process is required for all types of businesses, including merchandisers and service companies, to ensure accurate financial reporting.
5. Conclude with the correct statement: The correct statement is that temporary accounts, including Sales, Sales Returns and Allowances, and Cost of Goods Sold, are closed to the Income Summary account during the closing process.