OpenStax Principles of Accounting, Volume 1: Financial Accounting
Chapter 5: Completing the Accounting Cycle
Principles of Accounting, Volume 1: Financial Accounting
Chapter 5: Completing the Accounting Cycle
Multiple Choice
1. LO 5.1 Which of the following accounts is considered a temporary or nominal account?
A. Fees Earned Revenue
B. Prepaid Advertising
C. Unearned Service Revenue
D. Prepaid Insurance
Solution
A
2. LO 5.1 Which of the following accounts is considered a permanent or real account?
A. Interest Revenue
B. Prepaid Insurance
C. Insurance Expense
D. Supplies Expense
Solution
B
3. LO 5.1 If a journal entry includes a debit or credit to the Cash account, it is most likely which
of the following?
A. a closing entry
B. an adjusting entry
C. an ordinary transaction entry
D. outside of the accounting cycle
Solution
C
4. LO 5.1 If a journal entry includes a debit or credit to the Retained Earnings account, it is most
likely which of the following?
A. a closing entry
B. an adjusting entry
C. an ordinary transaction entry
D. outside of the accounting cycle
Solution
A
5. LO 5.1 Which of these accounts would be present in the closing entries?
A. Dividends
B. Accounts Receivable
C. Unearned Service Revenue
D. Sales Tax Payable
Solution
A
6. LO 5.1 Which of these accounts would not be present in the closing entries?
A. Utilities Expense
B. Fees Earned Revenue
C. Insurance Expense
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,OpenStax Principles of Accounting, Volume 1: Financial Accounting
Chapter 5: Completing the Accounting Cycle
D. Dividends Payable
Solution
D
7. LO 5.1 Which of these accounts is never closed?
A. Dividends
B. Retained Earnings
C. Service Fee Revenue
D. Income Summary
Solution
B
8. LO 5.1 Which of these accounts is never closed?
A. Prepaid Rent
B. Income Summary
C. Rent Revenue
D. Rent Expense
Solution
A
9. LO 5.1 Which account would be credited when closing the account for fees earned for the
year?
A. Accounts Receivable
B. Fees Earned Revenue
C. Unearned Fee Revenue
D. Income Summary
Solution
D
10. LO 5.1 Which account would be credited when closing the account for rent expense for the
year?
A. Prepaid Rent
B. Rent Expense
C. Rent Revenue
D. Unearned Rent Revenue
Solution
B
11. LO 5.2 Which of these accounts is included in the post-closing trial balance?
A. Sales Revenue
B. Salaries Expense
C. Retained Earnings
D. Dividends
Solution
C
12. LO 5.2 Which of these accounts is not included in the post-closing trial balance?
A. Land
B. Notes Payable
C. Retained Earnings
D. Dividends
Solution
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,OpenStax Principles of Accounting, Volume 1: Financial Accounting
Chapter 5: Completing the Accounting Cycle
D
13. LO 5.2 On which of the following would the year-end Retained Earnings balance be stated
correctly?
A. Unadjusted Trial Balance
B. Adjusted Trial Balance
C. Post-Closing Trial Balance
D. The Worksheet
Solution
C
14. LO 5.2 Which of these accounts is included in the post-closing trial balance?
A. Supplies Expense
B. Accounts Payable
C. Sales Revenue
D. Insurance Expense
Solution
B
15. LO 5.3 If current assets are $112,000 and current liabilities are $56,000, what is the current
ratio?
A. 200 percent
B. 50 percent
C. 2.0
D. $50,000
Solution
C
16. LO 5.3 If current assets are $100,000 and current liabilities are $42,000, what is the working
capital?
A. 200 percent
B. 50 percent
C. 2.0
D. $58,000
Solution
D
Questions
1. LO 5.1 Explain what is meant by the term real accounts (also known as permanent accounts).
Solution
Real/permanent accounts are those that carry over from one period to the next, with a continuing
balance in the account. Examples are asset accounts, liability accounts, and equity accounts. In
contrast, revenue accounts, expense accounts, and dividend accounts are not real/permanent
accounts.
2. LO 5.1 Explain what is meant by the term nominal accounts (also known as temporary
accounts).
Solution
Nominal/temporary accounts are those that carry a balance only for the current period, and then
at the end of the period, the balance is transferred (closed) into Retained Earnings, which is a
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, OpenStax Principles of Accounting, Volume 1: Financial Accounting
Chapter 5: Completing the Accounting Cycle
permanent account. Examples are revenue accounts, expense accounts, and dividend accounts. In
contrast, asset accounts, liability accounts, and equity accounts are not nominal/temporary
accounts.
3. LO 5.1 What is the purpose of the closing entries?
Solution
Closing entries are used to transfer the contents of the temporary accounts into the permanent
account, Retained Earnings, which resets the temporary balances to zero, enabling tracking of
revenues, expenses, and dividends in the next period.
4. LO 5.1 What would happen if the company failed to make closing entries at the end of the
year?
Solution
If the closing entries were not made, the following year’s Income Statement would be incorrect,
because it would include all of the revenue, expense transactions for the two years combined,
rather than just the current year.
5. LO 5.1 Which of these account types (Assets, Liabilities, Equity, Revenue, Expense,
Dividend) are credited in the closing entries? Why?
Solution
Expense accounts and dividend accounts are credited during closing. This is because closing
requires that the account balances be cleared, to prepare for the next accounting period.]
6. LO 5.1 Which of these account types (Assets, Liabilities, Equity, Revenue, Expense,
Dividend) are debited in the closing entries? Why?
Solution
Revenue accounts are debited during closing. This is because closing requires that the account
balances be cleared, to prepare for the next accounting period.
7. LO 5.1 The account called Income Summary is often used in the closing entries. Explain this
account’s purpose and how it is used.
Solution
Income Summary is a super-temporary account that is only used for closing. The revenue
accounts are closed by a debit to each account and a corresponding credit to Income Summary.
Then the expense accounts are closed by a credit to each account and a corresponding debit to
Income Summary. Finally, the balance in Income Summary is cleared by an entry that transfers
its balance to Retained Earnings. Thus, it is used in three journal entries, as part of the closing
process, and has no other purpose in the accounting records.
8. LO 5.1 What are the four entries required for closing, assuming that the Income Summary
account is used?
Solution
(1) Revenue accounts are closed by a debit entry to each account and a corresponding credit to
Income Summary; (2) Expense accounts are closed by a credit entry to each account and a
corresponding debit to Income Summary; (3) Income Summary is cleared by a debit or credit
entry that transfers its balance to Retained Earnings; and (4) Dividends is closed by a credit entry
and a corresponding debit directly to Retained Earnings.
9. LO 5.1 After the first two closing entries are made, Income Summary has a credit balance of
$125,500. What does this indicate about the company’s net income or loss?
Solution
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Chapter 5: Completing the Accounting Cycle
Principles of Accounting, Volume 1: Financial Accounting
Chapter 5: Completing the Accounting Cycle
Multiple Choice
1. LO 5.1 Which of the following accounts is considered a temporary or nominal account?
A. Fees Earned Revenue
B. Prepaid Advertising
C. Unearned Service Revenue
D. Prepaid Insurance
Solution
A
2. LO 5.1 Which of the following accounts is considered a permanent or real account?
A. Interest Revenue
B. Prepaid Insurance
C. Insurance Expense
D. Supplies Expense
Solution
B
3. LO 5.1 If a journal entry includes a debit or credit to the Cash account, it is most likely which
of the following?
A. a closing entry
B. an adjusting entry
C. an ordinary transaction entry
D. outside of the accounting cycle
Solution
C
4. LO 5.1 If a journal entry includes a debit or credit to the Retained Earnings account, it is most
likely which of the following?
A. a closing entry
B. an adjusting entry
C. an ordinary transaction entry
D. outside of the accounting cycle
Solution
A
5. LO 5.1 Which of these accounts would be present in the closing entries?
A. Dividends
B. Accounts Receivable
C. Unearned Service Revenue
D. Sales Tax Payable
Solution
A
6. LO 5.1 Which of these accounts would not be present in the closing entries?
A. Utilities Expense
B. Fees Earned Revenue
C. Insurance Expense
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,OpenStax Principles of Accounting, Volume 1: Financial Accounting
Chapter 5: Completing the Accounting Cycle
D. Dividends Payable
Solution
D
7. LO 5.1 Which of these accounts is never closed?
A. Dividends
B. Retained Earnings
C. Service Fee Revenue
D. Income Summary
Solution
B
8. LO 5.1 Which of these accounts is never closed?
A. Prepaid Rent
B. Income Summary
C. Rent Revenue
D. Rent Expense
Solution
A
9. LO 5.1 Which account would be credited when closing the account for fees earned for the
year?
A. Accounts Receivable
B. Fees Earned Revenue
C. Unearned Fee Revenue
D. Income Summary
Solution
D
10. LO 5.1 Which account would be credited when closing the account for rent expense for the
year?
A. Prepaid Rent
B. Rent Expense
C. Rent Revenue
D. Unearned Rent Revenue
Solution
B
11. LO 5.2 Which of these accounts is included in the post-closing trial balance?
A. Sales Revenue
B. Salaries Expense
C. Retained Earnings
D. Dividends
Solution
C
12. LO 5.2 Which of these accounts is not included in the post-closing trial balance?
A. Land
B. Notes Payable
C. Retained Earnings
D. Dividends
Solution
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,OpenStax Principles of Accounting, Volume 1: Financial Accounting
Chapter 5: Completing the Accounting Cycle
D
13. LO 5.2 On which of the following would the year-end Retained Earnings balance be stated
correctly?
A. Unadjusted Trial Balance
B. Adjusted Trial Balance
C. Post-Closing Trial Balance
D. The Worksheet
Solution
C
14. LO 5.2 Which of these accounts is included in the post-closing trial balance?
A. Supplies Expense
B. Accounts Payable
C. Sales Revenue
D. Insurance Expense
Solution
B
15. LO 5.3 If current assets are $112,000 and current liabilities are $56,000, what is the current
ratio?
A. 200 percent
B. 50 percent
C. 2.0
D. $50,000
Solution
C
16. LO 5.3 If current assets are $100,000 and current liabilities are $42,000, what is the working
capital?
A. 200 percent
B. 50 percent
C. 2.0
D. $58,000
Solution
D
Questions
1. LO 5.1 Explain what is meant by the term real accounts (also known as permanent accounts).
Solution
Real/permanent accounts are those that carry over from one period to the next, with a continuing
balance in the account. Examples are asset accounts, liability accounts, and equity accounts. In
contrast, revenue accounts, expense accounts, and dividend accounts are not real/permanent
accounts.
2. LO 5.1 Explain what is meant by the term nominal accounts (also known as temporary
accounts).
Solution
Nominal/temporary accounts are those that carry a balance only for the current period, and then
at the end of the period, the balance is transferred (closed) into Retained Earnings, which is a
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, OpenStax Principles of Accounting, Volume 1: Financial Accounting
Chapter 5: Completing the Accounting Cycle
permanent account. Examples are revenue accounts, expense accounts, and dividend accounts. In
contrast, asset accounts, liability accounts, and equity accounts are not nominal/temporary
accounts.
3. LO 5.1 What is the purpose of the closing entries?
Solution
Closing entries are used to transfer the contents of the temporary accounts into the permanent
account, Retained Earnings, which resets the temporary balances to zero, enabling tracking of
revenues, expenses, and dividends in the next period.
4. LO 5.1 What would happen if the company failed to make closing entries at the end of the
year?
Solution
If the closing entries were not made, the following year’s Income Statement would be incorrect,
because it would include all of the revenue, expense transactions for the two years combined,
rather than just the current year.
5. LO 5.1 Which of these account types (Assets, Liabilities, Equity, Revenue, Expense,
Dividend) are credited in the closing entries? Why?
Solution
Expense accounts and dividend accounts are credited during closing. This is because closing
requires that the account balances be cleared, to prepare for the next accounting period.]
6. LO 5.1 Which of these account types (Assets, Liabilities, Equity, Revenue, Expense,
Dividend) are debited in the closing entries? Why?
Solution
Revenue accounts are debited during closing. This is because closing requires that the account
balances be cleared, to prepare for the next accounting period.
7. LO 5.1 The account called Income Summary is often used in the closing entries. Explain this
account’s purpose and how it is used.
Solution
Income Summary is a super-temporary account that is only used for closing. The revenue
accounts are closed by a debit to each account and a corresponding credit to Income Summary.
Then the expense accounts are closed by a credit to each account and a corresponding debit to
Income Summary. Finally, the balance in Income Summary is cleared by an entry that transfers
its balance to Retained Earnings. Thus, it is used in three journal entries, as part of the closing
process, and has no other purpose in the accounting records.
8. LO 5.1 What are the four entries required for closing, assuming that the Income Summary
account is used?
Solution
(1) Revenue accounts are closed by a debit entry to each account and a corresponding credit to
Income Summary; (2) Expense accounts are closed by a credit entry to each account and a
corresponding debit to Income Summary; (3) Income Summary is cleared by a debit or credit
entry that transfers its balance to Retained Earnings; and (4) Dividends is closed by a credit entry
and a corresponding debit directly to Retained Earnings.
9. LO 5.1 After the first two closing entries are made, Income Summary has a credit balance of
$125,500. What does this indicate about the company’s net income or loss?
Solution
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