State BPA Fundamental Accounting Practice Exam

What does the amount closed to Capital from the Income summary represent?

1. Cash reserves for future use

2. The total revenue earned

3. The net income or loss during the fiscal period

4. The amount of owner withdrawals

The correct answer is: The net income or loss during the fiscal period

The amount closed to Capital from the Income Summary represents the net income or loss during the fiscal period because it reflects the total earnings of the business after all expenses have been deducted. At the end of an accounting period, revenues are matched with expenditures to yield either a profit (net income) or a loss. This net income or loss is then transferred to the Capital account, impacting the owner's equity. In this context, net income increases the Capital account, signifying that the owner has a higher stake in the business due to the earnings generated. Conversely, if there is a net loss, it decreases the Capital account, indicating a reduction in the owner's equity. This closing process is an essential step in preparing financial statements, as it allows for a clear representation of the financial standing of the business by appropriately reflecting how well it performed in terms of profitability during the period.