Which of the following correctly describes the closing entry process in financial accounting?

• A. Recording all cash receipts and cash payments for the period.
• B. Adjusting asset and liability accounts to their fair market values at year-end.
• C. Transferring the balances of temporary accounts to retained earnings to reset their balances to zero for the next period.
• D. Posting journal entries to correct errors found in previous periods.

Answer: (C)

Verified step by step guidance

1. Understand the purpose of the closing entry process: The closing entry process is used to transfer the balances of temporary accounts (such as revenues, expenses, and dividends) to permanent accounts (like retained earnings) at the end of an accounting period. This resets the temporary accounts to zero for the next period.
2. Identify temporary accounts: Temporary accounts include revenue accounts, expense accounts, and dividend accounts. These accounts are used to track activity for a specific accounting period and need to be closed to start fresh in the next period.
3. Prepare closing entries: Closing entries are journal entries that transfer the balances of temporary accounts to retained earnings. For example, revenue accounts are debited to reduce their balance to zero, and the same amount is credited to retained earnings. Similarly, expense accounts are credited to reduce their balance to zero, and the same amount is debited to retained earnings.
4. Post closing entries to the general ledger: After preparing the closing entries, post them to the general ledger to update the balances of the accounts. This ensures that temporary accounts have a zero balance and retained earnings reflect the net income or loss for the period.
5. Verify the post-closing trial balance: After closing entries are posted, prepare a post-closing trial balance to ensure that all temporary accounts have been reset to zero and only permanent accounts remain. This confirms the accuracy of the closing process.