Closing Entries: A Comprehensive Guide for Financial Accounting Professionals

Question 1

Which of these accounts is classified as a temporary account?

Accepted Answer

Income Summary

Answer

Cash

Answer

Retained Earnings

Answer

Accumulated Depreciation

Question 2

How do closing revenue and expense accounts affect the accounting equation?

Accepted Answer

Reduce assets, increase equity

Answer

Reduce assets, increase liabilities

Answer

Reduce assets, reduce liabilities

Answer

Increase assets, increase equity

Question 3

What is the main purpose of closing entries in financial accounting?

Accepted Answer

To close temporary accounts and transfer their balances to permanent accounts.

Answer

To update permanent accounts with the latest balances.

Answer

To create financial statements.

Answer

To correct errors made during the accounting period.

Question 4

What is the main reason for closing entries in the accounting cycle?

Accepted Answer

To move balances from temporary to permanent accounts.

Answer

To update financial statements for external reporting.

Answer

To end the accounting period and start the next one.

Question 5

At the end of an accounting period, which account is closed to Income Summary?

Accepted Answer

Sales Revenue

Answer

Assets

Answer

Accumulated Depreciation

Answer

Inventory

Question 6

How do closing entries affect the accounting equation?

Accepted Answer

They decrease Assets and decrease Equity

Answer

They decrease Assets and increase Liabilities

Answer

They increase Assets and decrease Equity

Answer

They have no impact on the accounting equation

Question 7

Which feature is unique to the Income Summary account?

Accepted Answer

It summarizes both revenues and expenses

Answer

It has a normal debit balance

Answer

It is closed directly to the Balance Sheet

Answer

It is a permanent account

Question 8

Which financial statement is not derived from the information provided by closing entries?

Accepted Answer

Statement of Cash Flows

Answer

Income Statement

Answer

Balance Sheet

Answer

Statement of Owner's Equity

Question 9

What is the effect of closing the Income Summary account to Retained Earnings?

Accepted Answer

Retained Earnings increases by the amount of net income.

Answer

Retained Earnings decreases by the amount of net income.

Answer

Retained Earnings increases by the amount of net loss.

Answer

Retained Earnings decreases by the amount of net loss.

Question 10

During closing entries, which account balance is transferred to Retained Earnings?

Accepted Answer

Income

Answer

Expense

Answer

Asset

Answer

Liability

Question 11

Which type of account is NOT closed during the closing process?

Accepted Answer

Retained Earnings

Answer

Income

Answer

Expense

Answer

Asset

Question 12

Calculate the net income for a company with total revenues of $100,000 and total expenses of $60,000.

Accepted Answer

$40,000

Answer

$60,000

Answer

$100,000

Answer

Cannot be determined from the provided information

Question 13

Define a contra-revenue account.

Accepted Answer

An account that reduces the balance of a revenue account

Answer

An account that increases the balance of a revenue account

Answer

An account that has no effect on revenue accounts

Answer

An account that is not reported on the income statement

Question 14

Why are closing entries reversed at the beginning of the next accounting period?

Accepted Answer

To reopen temporary accounts and prepare for the new period

Answer

To correct any errors made in the closing process

Answer

To adjust the balances of permanent accounts

Answer

There is no need to reverse closing entries

Question 15

Which of the following is NOT a purpose of closing entries?

Accepted Answer

To correct errors made during the accounting period

Answer

To transfer balances from temporary to permanent accounts

Answer

To prepare the post-closing trial balance

Answer

To zero out temporary account balances

Question 16

Which of the following is a characteristic of temporary accounts?

Accepted Answer

Balances are zeroed out after closing entries

Answer

Balances are carried forward to the next period

Answer

Used to record permanent changes in financial position

Answer

Examples include Cash and Accounts Receivable

Question 17

After closing entries are posted, the balances in temporary accounts should be:

Accepted Answer

Zero

Answer

Equal to the opening balances

Answer

Equal to the closing balances

Answer

Carried forward to the next accounting period

Question 18

What is the primary purpose of the post-closing trial balance?

Accepted Answer

To prove the equality of debits and credits after closing entries

Answer

To identify any errors made during the accounting period

Answer

To prepare for the preparation of financial statements

Answer

To close the accounting books and start a new period

Question 19

The closing entry for expense accounts involves:

Accepted Answer

Debiting expense accounts and crediting income summary

Answer

Crediting expense accounts and debiting income summary

Answer

Debiting income summary and crediting expense accounts

Answer

Crediting income summary and debiting expense accounts

Question 20

What is the impact of closing entries on the accounting equation?

Accepted Answer

It balances the equation at the end of each period

Answer

It reduces the Assets and Liabilities balances to zero

Answer

It transfers balances from the Balance Sheet to the Income Statement

Answer

It closes out the temporary account balances

Question 21

A temporary account is defined as an account that:

Accepted Answer

Is closed at the end of each accounting period

Answer

Accumulates balances over several accounting periods

Answer

Is not affected by closing entries

Answer

Is used solely for internal purposes

Question 22

Which of the following accounts is considered a permanent account?

Accepted Answer

Retained Earnings

Answer

Inventory

Answer

Sales Revenue

Answer

Accounts Receivable

Question 23

What is the primary purpose of closing entries in the accounting cycle?

Accepted Answer

To transfer balances from temporary to permanent accounts

Answer

To prepare the income statement

Answer

To adjust the balances of assets and liabilities

Answer

To calculate depreciation expense

Question 24

What is the closing entry to transfer the balance of the Revenue account to the Income Summary account?

Accepted Answer

Debit Income Summary, Credit Revenue

Answer

Debit Revenue, Credit Income Summary

Answer

Credit Income Summary, Debit Revenue

Answer

Debit Revenue and Expenses, Credit Income Summary

Question 25

What is the primary purpose of preparing a post-closing trial balance?

Accepted Answer

To verify the accuracy of the closing entries and ensure the equality of debits and credits

Answer

To prepare the financial statements

Answer

To adjust accounts for the upcoming period

Answer

To distribute dividends to shareholders

Question 26

What is the significance of the equality of the post-closing trial balance?

Accepted Answer

It indicates that the closing entries were recorded correctly, ensuring the accuracy of the accounting records.

Answer

It guarantees that the financial statements are accurate and reliable.

Answer

It means that the business is in a sound financial position.

Answer

It allows the accountants to close the books for the year.

Question 27

When is the appropriate time to record closing entries?

Accepted Answer

At the end of each fiscal year

Answer

At the end of each month

Answer

At the end of each quarter

Answer

Whenever there is a significant event

Question 28

What is the primary purpose of closing entries?

Accepted Answer

To transfer balances from temporary to permanent accounts

Answer

To adjust accounts to their correct year-end balances

Answer

To ensure the accounting equation remains in balance

Answer

To prepare the business for the upcoming accounting period

Question 29

Which of the following is NOT a type of closing entry?

Accepted Answer

Assets Closing Entry

Answer

Revenue Closing Entry

Answer

Expense Closing Entry

Answer

Dividend Closing Entry

Question 30

What is the impact of closing entries on the post-closing trial balance?

Accepted Answer

It contains only permanent accounts.

Answer

It has a zero balance for all accounts.

Answer

It shows the balances of all accounts as of the year-end.

Answer

It is identical to the pre-closing trial balance.

Question 31

Which of the following statements describes the closing process correctly?

Accepted Answer

It is performed at the end of the accounting period, typically annually.

Answer

It involves making several adjusting entries before closing entries.

Answer

It is only necessary for businesses using accrual accounting.

Answer

It is required by the Financial Accounting Standards Board (FASB), but not the International Financial Reporting Standards (IFRS).

Question 32

What is the fundamental difference between a debit and a credit in accounting?

Accepted Answer

Debits increase assets and expenses, while credits decrease them

Answer

Debits decrease assets and expenses, while credits increase them

Answer

Both debits and credits increase account balances

Answer

Both debits and credits decrease account balances

Question 33

Which of the following is not a type of adjusting entry made at the end of an accounting period?

Accepted Answer

Closing entries

Answer

Accrued revenue

Answer

Prepaid expense

Answer

Depreciation

Question 34

When closing entries are posted, the balances in which type of accounts are reduced to zero?

Accepted Answer

Temporary accounts

Answer

Permanent accounts

Answer

Real accounts

Answer

Nominal accounts

Question 35

In the closing entry for revenue accounts, which account is credited?

Accepted Answer

Income Summary

Answer

Retained Earnings

Answer

Expense Summary

Answer

Balance Sheet Summary

Question 36

After posting closing entries, which type of trial balance is prepared?

Accepted Answer

Post-closing trial balance

Answer

Unadjusted trial balance

Answer

Adjusted trial balance

Answer

Corrected trial balance

Question 37

What is the purpose of the post-closing trial balance?

Accepted Answer

Verifying the accuracy of the closing entries

Answer

Preparing the income statement

Answer

Updating the ledger

Answer

Closing the accounting period

Question 38

What is a crucial reason for performing closing entries?

Accepted Answer

Preparing accurate financial statements

Answer

Calculating taxes owed

Answer

Preventing fraud

Answer

Maintaining internal control

Question 39

Which of the following is the central purpose of closing entries?

Accepted Answer

To transfer balances from temporary accounts to permanent accounts, zeroing out the temporary accounts.

Answer

To update the general ledger at the end of the accounting cycle.

Answer

To prepare financial statements directly.

Answer

To allocate costs to inventory.

Question 40

Which types of accounts are closed at the conclusion of the accounting period?

Accepted Answer

Temporary accounts, such as revenue and expense accounts

Answer

Asset and liability accounts

Answer

Permanent accounts, such as cash and equipment

Answer

Contra revenue and contra expense accounts

Question 41

How do closing entries impact the fundamental accounting equation?

Accepted Answer

They reset the balances of temporary accounts to zero.

Answer

They alter the balances of permanent accounts.

Answer

They do not affect the accounting equation.

Answer

They increase the total assets of the business.

Question 42

At what point in the accounting cycle should closing entries be reversed?

Accepted Answer

The beginning of the new accounting period

Answer

The end of the new accounting period

Answer

They should never be reversed.

Answer

When the business ceases operations

Question 43

What is the specific journal entry used to close the Revenue account?

Accepted Answer

Credit Revenue, Debit Income Summary

Answer

Debit Revenue, Credit Income Summary

Answer

Debit Income Summary, Credit Revenue

Answer

Credit Income Summary, Debit Revenue

Question 44

True or False: Closing entries are solely applicable to manual accounting systems.

Accepted Answer

False

Answer

True

Question 45

Which of the following is NOT a potential benefit of performing closing entries?

Accepted Answer

Enabling the payment of dividends

Answer

Facilitating accurate reporting of financial performance

Answer

Simplifying the bank reconciliation process

Answer

Providing a basis for preparing financial statements

Question 46

What is the primary purpose of performing closing entries in the accounting cycle?

Accepted Answer

To transfer account balances from temporary to permanent accounts.

Answer

To update the company's retained earnings account.

Question 47

Typically, when are closing entries performed?

Accepted Answer

At the conclusion of the accounting period

Answer

Before the start of each accounting period

Question 48

Identify the type of account where balances are permanently retained after closing entries:

Accepted Answer

Permanent accounts

Answer

Temporary accounts

Question 49

What is the impact of closing entries on the fundamental accounting equation?

Accepted Answer

Assets = Liabilities + Equity remains unaffected.

Answer

Revenues - Expenses = Net Income

Question 50

MCQ 7: Which of the following is NOT an advantage of using closing entries?

Accepted Answer

Eliminates the risk of accounting errors

Answer

Simplifies financial records

Answer

Provides a clearer view of financial performance

Answer

Facilitates financial statement preparation

Question 51

What is the main purpose of closing entries in accounting?

Accepted Answer

To transfer balances from temporary to permanent accounts

Answer

To update the balances in the income statement

Answer

To prepare the balance sheet

Answer

To adjust the balances in the retained earnings account

Question 52

How do closing entries affect the accounting equation (Assets = Liabilities + Equity)?

Accepted Answer

They maintain the equality of the equation

Answer

They alter the equation by increasing assets

Answer

They alter the equation by decreasing liabilities

Answer

They alter the equation by increasing equity

Question 53

When closing revenue accounts, which account is debited?

Accepted Answer

Income Summary

Answer

Retained Earnings

Answer

Expenses

Answer

Dividends

Question 54

What is the effect of closing entries on the balance sheet?

Accepted Answer

Update the balances of asset and liability accounts

Answer

Reset all account balances to zero

Answer

Update the balances of revenue and expense accounts

Answer

Update the balances of all accounts

Question 55

Which of the following is considered a temporary account?

Accepted Answer

Sales Revenue

Answer

Cash

Answer

Accounts Payable

Answer

Retained Earnings

Question 56

What is the primary reason for reversing closing entries at the start of a new accounting period?

Accepted Answer

To reset the balances of temporary accounts

Answer

To update the balances of permanent accounts

Answer

To prepare the post-closing trial balance

Answer

To adjust the balances of revenue and expense accounts

Question 57

Which action is NOT part of the closing process?

Accepted Answer

Preparing a trial balance

Answer

Journalizing closing entries

Answer

Posting closing entries

Answer

Preparing a post-closing trial balance