In the context of closing entries in financial accounting, what is the primary purpose of preparing closing entries at the end of an accounting period?

• A. To adjust the balances of permanent accounts
• B. To transfer the balances of temporary accounts to retained earnings
• C. To record the purchase of new assets
• D. To prepare the trial balance for the next period

Answer: (B)

Verified step by step guidance

1. Understand the concept of closing entries: Closing entries are journal entries made at the end of an accounting period to transfer the balances of temporary accounts (such as revenues, expenses, and dividends) to permanent accounts (like retained earnings). This process resets the temporary accounts to zero for the next accounting period.
2. Identify the purpose of closing entries: The primary purpose is to ensure that the temporary accounts do not carry over their balances into the next accounting period. This allows the company to start fresh with these accounts for the new period.
3. Recognize the accounts involved: Temporary accounts include revenue, expense, and dividend accounts. Permanent accounts, such as retained earnings, are updated through the closing process.
4. Understand the mechanics of closing entries: For each temporary account, a closing entry is made to transfer its balance to the retained earnings account. For example, revenue accounts are debited, and retained earnings are credited; expense accounts are credited, and retained earnings are debited.
5. Relate the purpose to the options provided: The correct answer is 'To transfer the balances of temporary accounts to retained earnings,' as this aligns with the goal of closing entries to reset temporary accounts and update retained earnings for the next accounting period.