Which if the following is NOT true about closing entries?
A) Closing entries move the balances of nominal accounts to the owner’s capital account.
B) Closing entries are an optional step in the accounting cycle.
C) Closing entries are made later in the accounting cycle than adjusting entries.
D) Closing entries are made before the post-closing trial balance is prepared.
The correct answer and explanation is :
The correct answer is:
B) Closing entries are an optional step in the accounting cycle.
Explanation:
Closing entries are a mandatory step in the accounting cycle, not an optional one. They are essential for properly transitioning from one accounting period to the next. Closing entries ensure that all temporary (nominal) accounts—such as revenues, expenses, and withdrawals—are reset to zero at the end of an accounting period. This allows the company to start the new period with a clean slate and measure income accurately.
Importance of Closing Entries:
- Transfer of Balances – Closing entries move balances from temporary accounts (revenues, expenses, and drawings) to the permanent owner’s capital account. This helps in correctly reflecting the company’s financial position.
- Facilitating the Next Period – Without closing entries, the balances of temporary accounts would carry over, making it difficult to determine income for the next period.
- Preparation of Financial Statements – Closing entries ensure accurate financial reporting by ensuring temporary accounts are cleared before the new period starts.
Why the Other Options Are Correct:
- A) True – Closing entries move the balances of nominal accounts (revenues, expenses, and drawings) to the owner’s capital or retained earnings.
- C) True – Closing entries occur after adjusting entries because adjustments ensure revenues and expenses are recorded correctly before closing the accounts.
- D) True – Closing entries must be completed before preparing the post-closing trial balance to ensure only permanent accounts (assets, liabilities, and equity) remain.
Thus, since closing entries are not optional, the correct answer is B.
