Which of the following account balances would be closed at year-end?
A. Interest expense
B. Accumulated depreciation
C. Retained earnings
D. Unearned revenues
The correct answer and explanation is :
The correct answer is: A. Interest expense
Explanation (300 Words):
At the end of an accounting period, certain account balances are closed to prepare for the next period. This process involves transferring the balances of temporary accounts to a permanent account, typically Retained Earnings, and resetting them to zero for the new accounting period.
Temporary vs. Permanent Accounts
Temporary accounts are used to record transactions for a specific accounting period. These include:
- Revenues
- Expenses
- Gains and losses
- Dividends (in the case of corporations)
These accounts are closed at year-end to measure performance over a specific period and to avoid mixing financial activity from different periods.
Permanent accounts, on the other hand, carry their balances into future periods and are not closed at year-end. These include:
- Assets
- Liabilities
- Equity accounts (like Retained Earnings and Common Stock)
Analysis of Options
- A. Interest expense: This is a temporary account. It is closed at the end of the year by transferring its balance to the Income Summary account, which eventually flows into Retained Earnings. This makes it the correct answer.
- B. Accumulated depreciation: This is a contra-asset account, and it is permanent. It is not closed at year-end because it accumulates over time to reflect the total depreciation taken on an asset.
- C. Retained earnings: This is a permanent equity account. In fact, temporary accounts are closed into Retained Earnings, not the other way around.
- D. Unearned revenues: This is a liability account. It reflects money received before services are performed and is a permanent account. It carries forward until the revenue is earned.
Conclusion:
Only Interest Expense is a temporary account that would be closed at year-end, making A the correct answer.