At the end of the year, where are all income and expense account balances transferred during the closing entries process?

• A. To the Retained Earnings account directly
• B. To the Income Summary account
• C. To the Cash account
• D. To the Capital account

Answer: (B)

Verified step by step guidance

1. Understand the purpose of closing entries: Closing entries are used to transfer the balances of temporary accounts (income and expense accounts) to permanent accounts at the end of the accounting period.
2. Identify the temporary accounts: Temporary accounts include revenue, expense, and dividend accounts. These accounts are closed to reset their balances to zero for the next accounting period.
3. Determine the intermediary account: During the closing process, income and expense account balances are first transferred to an intermediary account called the Income Summary account. This account is used to summarize the net income or loss for the period.
4. Transfer the net balance: After the balances are transferred to the Income Summary account, the net balance (net income or net loss) is then transferred to the Retained Earnings account (or Capital account for sole proprietorships/partnerships).
5. Finalize the process: Ensure that all temporary accounts have a zero balance after the closing entries are made, and verify that the Retained Earnings account reflects the updated balance for the period.