Which account is closed to the Owner's Capital account at year end?

Which account is closed to the Owner's Capital account at year end?

• A. Revenue
• B. Expenses
• C. Asset
• D. Drawings

Answer: (D)

The key idea is how year-end closing entries affect owner’s equity. Drawings, which represent the owner taking money out, reduce the owner's equity and are a temporary (sharp, period-specific) account that must be closed out at year end into the permanent owners’ capital account. The closing entry transfers the balance in Drawings into Owner’s Capital by debiting Owner’s Capital (which reduces its balance) and crediting Drawings (which zeros that account). This reflects the reduction in the owner’s stake due to withdrawals. Revenue and Expense accounts are handled differently: they’re closed to an income summary (and then that summary is closed to Owner’s Capital), not directly into Owner’s Capital, which is why Drawings is the account that closes to the Owner’s Capital at year end.

The key idea is how year-end closing entries affect owner’s equity. Drawings, which represent the owner taking money out, reduce the owner's equity and are a temporary (sharp, period-specific) account that must be closed out at year end into the permanent owners’ capital account. The closing entry transfers the balance in Drawings into Owner’s Capital by debiting Owner’s Capital (which reduces its balance) and crediting Drawings (which zeros that account). This reflects the reduction in the owner’s stake due to withdrawals. Revenue and Expense accounts are handled differently: they’re closed to an income summary (and then that summary is closed to Owner’s Capital), not directly into Owner’s Capital, which is why Drawings is the account that closes to the Owner’s Capital at year end.