Which of the following accurately describes the purpose of closing entries in the accounting cycle?

• A. They transfer the balances of temporary accounts to a permanent equity account at the end of the period.
• B. They are used to correct errors found in previous journal entries.
• C. They adjust asset and liability accounts to their fair market values.
• D. They record the acquisition of new assets during the accounting period.

Answer: (A)

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 a permanent equity account, typically 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 temporary accounts do not carry over their balances into the next accounting period, allowing for accurate tracking of financial performance for each period.
3. Analyze the options provided: Evaluate each option to determine which one aligns with the purpose of closing entries. For example, closing entries do not correct errors, adjust asset and liability accounts to fair market values, or record acquisitions of new assets.
4. Match the correct description: The correct description of closing entries is that they transfer the balances of temporary accounts to a permanent equity account at the end of the period.
5. Conclude the reasoning: Closing entries are a crucial step in the accounting cycle to finalize the period's financial results and prepare the accounts for the next period.