Which is the purpose of closing entries, and which accounts are typically closed?

• A. To reset temporary accounts to zero and transfer net income to retained earnings.
• B. To reset permanent accounts to zero.
• C. To adjust permanent accounts for year-end balances.
• D. To record depreciation and amortization.

Answer: (A)

Closing entries are about wrapping up the period by resetting the balances of temporary accounts to zero and moving the period’s net result into Retained Earnings. Temporary accounts—revenues and expenses (and often dividends or withdrawals)—are used only for the current period, so they must be closed out so a new period can start fresh. By transferring the net income (or net loss) to Retained Earnings, the income statement for the period remains separate from the accumulated equity shown on the balance sheet. Permanent accounts, like most assets, liabilities, and equity balances (other than Retained Earnings), aren’t closed because their balances carry forward. Depreciation and amortization are adjustments recorded during the period, not closing entries. Therefore the described purpose—resetting temporary accounts to zero and transferring net income to Retained Earnings—best fits.