Question

What is the purpose of the owner capital account in the closing process? a.Owner capital is where the period's net income or loss is transferred. b.Owner capital is used as a temporary account. c.Owner capital is used to verify that net income or loss is reported correctly. d.Owner capital is a clearing account used to zero out all real accounts.

Answer 1

Answer:

The correct answer is a.Owner capital is where the period's net income or loss is transferred.

Explanation:

The income and expense accounts are canceled and closed at the end of each accounting period, transferring their balances to a summary bridge account entitled "profit and loss", where the balances are summarized. The amounts of the profit and loss account, which reflect the net profit or loss for the period, are transferred to the owner's capital account. These operations are necessary because:

1. Revenues really increase stockholders' equity, while expenses decrease it.
2. Through the accounting period these increases and decreases are accumulated in income and expense accounts, not within the owner's capital account.
3. Closing entries at the end of each accounting period transfer the net effect of these increases and decreases, from the income and expense accounts to the owner's capital account.

In addition, closing entries allow income and expense accounts to start each of the new accounting periods with zero balances. This is also necessary because:

1. The income statement reflects the income and expenses incurred during an accounting period and is prepared based on the information recorded in the income and expense accounts.
2. These accounts must begin each new accounting period with a zero balance, if it is desired that the end-of-period balances accurately reflect the income and expenses of said period.