Future Business Leaders of America (FBLA) Accounting Practice Test

What are closing entries used for?

1. To consolidate financial statements

2. To prepare temporary accounts for a new fiscal period

3. To finalize tax returns

4. To calculate year-end bonuses

The correct answer is: To prepare temporary accounts for a new fiscal period

Closing entries are a fundamental aspect of the accounting cycle, primarily utilized to prepare temporary accounts for a new fiscal period. At the end of an accounting period, businesses need to reset the balances of temporary accounts—such as revenues, expenses, and dividends—to zero. This process allows for a fresh start in the upcoming period, ensuring that only the revenues and expenses incurred in that specific period are reflected in the financial statements. By closing these accounts, businesses can accurately measure operational performance within each fiscal period. It also aids in ensuring that the income statement captures only the activities of a single period without any carryover from previous periods. This segregation is essential for stakeholders who rely on accurate and timely financial information to assess the company's performance. While consolidating financial statements, finalizing tax returns, and calculating year-end bonuses are important financial tasks, they do not directly pertain to the function of closing entries in the accounting process. Closing entries specifically focus on resetting temporary accounts to maintain clear financial records for each reporting period.