Question

Closing entries will

A increase the owners capital

B decrease the owners capital balance

C either increase or decrease the owners capital

D not affect the owners capital balance

Answer 1

Correct answer is C. either increase or derease the owners capital

As per the closing entrries, the revenues and expenses made during the year are credited and debited to the Income summary account respectively. The net balance of the income summary is then posted to the owners capital account.

In case the revenues exceeds the expense i.e. in case of profit, the income summary will have credit balance which will increase the owners capital. While in case of loss, the income summary account will have debit balance hich will decrease the owners capital acccount.