What is the purpose of closing entries?

• A. To transfer permanent account balances to the owner's capital and reset temporary accounts to zero for the next period
• B. To reconcile bank statements and adjust cash balances
• C. To record depreciation and amortization for the period
• D. To transfer temporary account balances (revenues and expenses) to the owner's capital or retained earnings and reset them to zero for the next period

Answer: (D)

Closing entries focus on clearing the temporary accounts at period end so the next period starts with a clean slate. Revenues and expenses are temporary accounts that accumulate activity during the period, and their balances are not carried forward. By transferring the net result of these accounts—net income or net loss—into the owner’s capital (for a sole proprietorship) or retained earnings (for a corporation), the equity base is updated to reflect the period’s performance. Permanent accounts like assets, liabilities, and the original owner’s capital balance carry forward unchanged, so they are not closed. This separation keeps the income statement of the new period independent from the previous one and ensures the balance sheet remains accurate for ongoing operations. Bank reconciliation and depreciation are related tasks but occur outside the closing process.