In the closing process of the accounting cycle, the following steps occur:
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Temporary Accounts: All temporary accounts (revenue, expenses, withdrawals/dividends) are closed to the Income Summary account first, which ultimately will be closed to Retained Earnings.
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Closing Revenue Accounts: Revenue accounts are closed by debiting them and crediting the Income Summary account.
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Closing Expense Accounts: Expense accounts are closed by crediting them and debiting the Income Summary account.
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Income Summary Closure: After closing all revenues and expenses, the balance in the Income Summary account (which represents the net income or loss for the period) is then closed to Retained Earnings. If there is a net income, the Income Summary is debited and Retained Earnings is credited. If there is a net loss, the Income Summary is credited and Retained Earnings is debited.
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Closing Withdrawals/Dividends: If applicable, withdrawals (for sole proprietorships) or dividends (for corporations) are closed to Retained Earnings by debiting Retained Earnings and crediting the Withdrawals or Dividends account.
To clarify the statement options provided:
- Fixed assets are not closed in the traditional closing entries; their depreciation expense may be, but the fixed asset accounts themselves are not closed.
- Liabilities are not closed; they carry over to the next accounting period.
- Withdrawals are closed through a debit to Retained Earnings (this is correct but refers specifically to proprietorships).
- Dividends are closed through a debit to Retained Earnings (this is correct).
Given your options, the closest correct statement would be:
- Dividends are closed through a debit and then transferred to retained earnings.
This aligns with the typical closing entries procedure.