NOCTI Accounting Foundations Practice Test

Closing a proprietorship’s books involves zeroing out temporary accounts and updating the owner’s equity. First, close the revenue accounts by transferring their balances to Income Summary (debit Revenue, credit Income Summary). This aggregates all the period’s income in one place. Next, close the expense accounts by transferring their balances to Income Summary (debit Income Summary, credit Expenses). Now Income Summary reflects the net result of revenues minus expenses. Then, close Income Summary to the Owner’s Capital account to move the net income (if there is one) into owner’s equity (debit Income Summary, credit Owner’s Capital). Finally, close the Drawing account to Owner’s Capital (debit Owner’s Capital, credit Drawing) to reflect the owner’s withdrawals reducing equity. This sequence ensures temporary accounts are reset to zero for the next period and net income increases or decreases the owner’s capital appropriately, with drawings treated as a separate adjustment to equity. The described order—Revenue, Expenses, Income Summary, Drawing—matches the standard closing process.