Which of the following accounts will be closed by debiting retained earnings?
Question
Which of the following accounts will be closed by debiting retained earnings?
Solution
The accounts that will be closed by debiting Retained Earnings are:
Step 1: Dividend Accounts Dividend accounts are closed to Retained Earnings at the end of the accounting period. Dividends are distributions of earnings to shareholders, which reduce the Retained Earnings account. Therefore, to close the Dividends account, you would debit Retained Earnings and credit Dividends.
Step 2: Income Summary Account (if there's a net loss) The Income Summary account is a temporary account used to close all revenue and expense accounts. If the company has a net loss for the period (i.e., expenses exceed revenues), this loss reduces Retained Earnings. Therefore, to close the Income Summary account, you would debit Retained Earnings and credit Income Summary.
Remember, the purpose of closing entries is to reset the balance of temporary accounts (revenues, expenses, and dividends) to zero for the next accounting period, and to update the balance of Retained Earnings to reflect the events of the period just ended.
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