Which of the following transactions is considered a closing journal entry?

• A. Paying cash dividends to shareholders
• B. Adjusting prepaid insurance to reflect expired coverage
• C. Recording the purchase of office supplies on account
• D. Transferring the balance of the Service Revenue account to the Income Summary account

Answer: (D)

Verified step by step guidance

1. Understand the concept of closing journal entries: Closing entries are made at the end of an accounting period to transfer balances from temporary accounts (e.g., revenues, expenses, and dividends) to permanent accounts (e.g., retained earnings). This process resets the temporary accounts to zero for the next accounting period.
2. Identify the purpose of transferring the balance of the Service Revenue account to the Income Summary account: This is a closing entry because Service Revenue is a temporary account. Its balance is transferred to the Income Summary account to summarize the period's revenues and expenses before ultimately transferring the net income or loss to Retained Earnings.
3. Compare the other transactions listed: Paying cash dividends to shareholders is not a closing entry; it is a distribution of earnings. Adjusting prepaid insurance to reflect expired coverage is an adjusting entry, not a closing entry. Recording the purchase of office supplies on account is a regular transaction, not related to closing entries.
4. Recognize the mechanics of the closing entry for Service Revenue: To close the Service Revenue account, you would debit the Service Revenue account (to reduce its balance to zero) and credit the Income Summary account (to transfer the revenue balance).
5. Understand the broader context: Closing entries are part of the accounting cycle and are essential for preparing the accounts for the next period. They ensure that temporary accounts start with a zero balance, while permanent accounts reflect the cumulative financial position of the company.