After a bankruptcy procedure is completed, which of the following is the correct accounting treatment for the balances of temporary accounts during the closing entries process?

• A. Temporary accounts remain open until the next fiscal year.
• B. All temporary accounts are closed to the retained earnings account.
• C. Temporary accounts are carried forward to the next accounting period.
• D. Temporary accounts are closed to the capital stock account.

Answer: (B)

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 reset to zero at the end of the period.
2. Learn the purpose of closing entries: Closing entries are made at the end of an accounting period to transfer the balances of temporary accounts to permanent accounts, ensuring that temporary accounts start fresh in the next period.
3. Identify the correct permanent account for closing: In most cases, temporary accounts are closed to the retained earnings account, which is a part of the equity section of the balance sheet. Retained earnings represent the accumulated profits or losses of the company.
4. Understand why temporary accounts are not carried forward: Temporary accounts are designed to track activity for a single accounting period. Carrying them forward would conflict with the principle of periodicity in accounting, which requires financial results to be reported for specific periods.
5. Clarify the incorrect options: Temporary accounts are not closed to the capital stock account, as capital stock represents ownership interest and is not affected by operational results. Additionally, temporary accounts do not remain open or carry forward to the next fiscal year, as this would violate the purpose of closing entries.