When preparing the closing entries for a partnership at the end of the accounting period which of the following statements is correct? Assume that capital account balances are not fixed.
A) The retained earnings account is closed to the profit or loss summary account.
B) The drawings accounts are closed to the capital accounts.
C) Income and expenses are closed to the capital accounts.
D) The profit or loss summary account is closed to the retained earnings accounts.

Question

Quizplus · Accepted Answer

In a partnership, the drawings accounts, which represent withdrawals by the partners, are closed to the individual partners' capital accounts to reflect the reduction in their capital due to these withdrawals. Unlike corporations, partnerships do not have retained earnings accounts; instead, income, expenses, and the resulting profit or loss are directly closed to the partners' capital accounts, but this specific action is not described in option B. Options A and D mention the retained earnings account, which is not applicable to partnerships, and option C inaccurately suggests that income and expenses are closed directly to the capital accounts, omitting the role of the profit or loss summary account in this process.

When Preparing the Closing Entries for a Partnership at the End