Explain the closing process at period-end and the purpose of closing entries?

• A. The closing process resets permanent accounts to zero balances
• B. The closing process transfers cash balances to Retained Earnings
• C. Temporary accounts are reset by transferring their balances to Retained Earnings, and dividends are transferred to Retained Earnings as well
• D. The closing process closes revenues and expenses directly to Retained Earnings without an intermediate step

Answer: (D)

Closing entries are made at period end to prepare for the next period by clearing out temporary accounts and updating Retained Earnings to reflect the period’s results. Revenues and expenses are temporary accounts that should not carry balances into the next period, so their activity is transferred into Retained Earnings, which records the net effect of operations on the company’s equity. While many texts show an intermediate step through an Income Summary, the essential outcome is the same: temporary accounts are reset to zero and Retained Earnings is adjusted for net income and dividends. In practice, dividends are also closed into Retained Earnings, reducing it. This description fits the idea that the closing process ultimately moves the period’s results into Retained Earnings in one consolidated step.