After preparing the financial statements for the current year,the accountant for Exquisite Gems closed the Dividends account at year-end by debiting Income Summary and crediting the Dividends account.What is the effect of this entry on current-year net income and the balance in the Retained Earnings account at year-end?
A)Net income is overstated and the balance in the Retained Earnings account is correct.
B)Net income is correct and the balance in the Retained Earnings account is overstated.
C)Net income is understated and the balance in the Retained Earnings account is correct.
D)Net income is understated and the balance in the Retained Earnings account is overstated.

Question

Quizplus · Accepted Answer

The Dividends account is closed to Income Summary at the end of the year to transfer the amount of dividends declared during the year to the Income Summary account. This entry reduces net income by the amount of dividends declared. The Retained Earnings account is then debited for the amount of net income and credited for the amount of dividends declared. This entry increases the balance in the Retained Earnings account by the amount of net income minus the amount of dividends declared. Therefore, the effect of the entry is to reduce net income and increase the balance in the Retained Earnings account.

After Preparing the Financial Statements for the Current Year,the Accountant