The entry to close the Fees Earned account would cause:
A) the Capital account balance to increase.
B) the Capital account balance to decrease.
C) the Fees Earned account to decrease.
D) None of these are correct.
The Correct Answer and Explanation is:
Correct Answer: A) the Capital account balance to increase.
Explanation
In accounting, revenue accounts like Fees Earned are temporary accounts. These temporary accounts are used to record revenue and expenses during an accounting period. At the end of the period, they must be closed so that the balances do not carry over to the next period. This closing process resets these accounts to zero in preparation for the new accounting period.
To close the Fees Earned account, the accountant will debit (reduce) the Fees Earned account and credit (increase) the Capital account or Income Summary account, depending on the accounting system used. In a simplified accounting cycle for a sole proprietorship, revenue is closed directly to the Capital account.
Here’s how the journal entry would look:
Dr. Fees Earned xxx
Cr. Capital xxx
This entry decreases the Fees Earned account (bringing its balance to zero) and increases the Capital account by the same amount, thereby transferring the net income into the owner’s equity. The rationale is that revenue increases the profitability of the business, and this profit belongs to the owner(s). Therefore, it is added to their capital or equity.
Option C is partially true in that the Fees Earned account will decrease—but it’s not the full answer. The key effect of this closing entry is its impact on the Capital account, which increases due to the revenue being added.
Option B is incorrect because a decrease in revenue would not reduce capital during the closing process—it would increase it.
Option D is also incorrect because there is a clearly defined accounting effect resulting from this closing entry.
Therefore, the correct and most complete answer is:
A) the Capital account balance to increase.
