Which of the following could not possibly be a closing entry?
a. Debit Income Summary and credit Owner’s Capital
b. Debit Owner’s Capital and credit Owner’s Withdrawals
c. Debit Income Summary and credit Owner’s Withdrawals
d. Debit Owner’s Capital and credit Income Summary
The correct answer and explanation is :
Correct Answer: C. Debit Income Summary and Credit Owner’s Withdrawals
Explanation:
In accounting, closing entries are made at the end of an accounting period to reset revenue, expense, and withdrawal accounts to zero and transfer their balances to the owner’s capital account. The four typical closing entries are:
- Closing Revenues to Income Summary:
- Debit Revenue Accounts
- Credit Income Summary
- Closing Expenses to Income Summary:
- Debit Income Summary
- Credit Expense Accounts
- Closing Income Summary to Owner’s Capital (for sole proprietorships) or Retained Earnings (for corporations):
- If the business had a net profit, the entry is:
- Debit Income Summary
- Credit Owner’s Capital
- If the business had a net loss, the entry would be the opposite:
- Debit Owner’s Capital
- Credit Income Summary
- Closing Withdrawals (or Dividends) to Owner’s Capital:
- Debit Owner’s Capital
- Credit Owner’s Withdrawals
Why Option C is Incorrect:
The incorrect option, “Debit Income Summary and Credit Owner’s Withdrawals,” does not follow proper closing entry logic. Withdrawals (or drawings) are not closed through Income Summary but directly to the Owner’s Capital account. Income Summary is only used to close revenues and expenses, summarizing the net income or loss before transferring it to the owner’s capital.
Thus, an entry attempting to close withdrawals through Income Summary is incorrect, as withdrawals do not affect net income. Instead, withdrawals reduce Owner’s Capital, not Income Summary.
Therefore, the answer is C.