Closing entries ultimately will affect
a. total liabilities
b. the Cash account
c. total assets.
d. the Owner’s Capital account.
The correct answer and explanation is :
Correct Answer:
d. the Owner’s Capital account.
Explanation:
Closing entries are journal entries made at the end of an accounting period to transfer balances from temporary accounts to a permanent account. Temporary accounts include revenue, expenses, and drawings (withdrawals), which are closed to the Owner’s Capital account (for a sole proprietorship) or Retained Earnings (for a corporation).
How Closing Entries Work:
- Revenue Accounts: These are closed to the Income Summary account. This step removes all revenue account balances, preparing them for the next period.
- Expense Accounts: All expenses are also closed to the Income Summary account. This results in a net balance that reflects the company’s net income or net loss.
- Income Summary: The net balance (net income or loss) is transferred to the Owner’s Capital account.
- Drawings/Withdrawals: If the owner has taken money out of the business, the drawing account balance is also closed to the Owner’s Capital account.
Why Does It Affect the Owner’s Capital Account?
- The closing process summarizes the financial performance of the business and updates the Owner’s Capital account accordingly.
- If the business earns a profit, the capital account increases.
- If there is a net loss, the capital account decreases.
- Owner withdrawals also reduce the capital balance.
Why Not Other Options?
- (a) Total Liabilities: Closing entries do not affect liabilities; these are part of permanent accounts.
- (b) The Cash Account: Cash is a real (permanent) account and is not closed.
- (c) Total Assets: Closing entries do not directly impact asset balances.
Thus, the correct answer is (d) the Owner’s Capital account because it reflects the net result of revenues, expenses, and withdrawals after closing entries.