The accumulated depreciation account is closed to the retained earnings account. true or false
The Correct Answer and Explanation is:
The statement is false.
Accumulated depreciation is a contra-asset account, meaning it is paired with an asset account but has a credit balance, which reduces the total value of assets on the balance sheet. When closing accounts, you do not close the accumulated depreciation directly to retained earnings. Instead, accumulated depreciation is typically closed or adjusted during the year-end process, but it does not go to retained earnings.
Retained earnings, on the other hand, is a shareholders’ equity account. It represents the portion of net income that has been retained in the company rather than distributed as dividends. At the end of the accounting period, the net income or net loss is transferred to retained earnings. The closing of the accumulated depreciation account does not affect retained earnings directly, except as part of the depreciation expense (which impacts the income statement and, ultimately, net income).
Closing Process typically involves the following steps:
- Revenue accounts (e.g., sales) are closed to the income summary account.
- Expense accounts (e.g., depreciation expense) are also closed to the income summary.
- The balance of the income summary account (net income or loss) is then closed to retained earnings.
Thus, while depreciation expense does reduce the net income (and, indirectly, retained earnings), accumulated depreciation itself is not closed to retained earnings. It remains on the balance sheet, reducing the book value of the corresponding fixed asset.
