Which of the following accounts will not be closed to the capital account at the end of the year?

Question

BlackTom AI · Accepted Answer

Permanent accounts carry forward to the next accounting period, while temporary accounts are closed to the owner’s capital (or retained earnings) at period end.

1. Relevant concepts
- Temporary (nominal) accounts: revenues, expenses, and withdrawals/drawings. These are closed at year-end to the Income Summary and then to the Capital account (or retained earnings) so net income/ loss is transferred to owner’s equity.  
- Permanent (real) accounts: asset, liability, and equity balances that remain on the balance sheet and are not closed. Prepaid Insurance is an asset (a prepaid expense) and therefore a permanent account.

2. Step-by-step reasoning
- Identify account type for each option:
  - Utilities Expense: expense → temporary.
  - Prepaid Insurance: asset (prepaid) → permanent.
  - Fees Earned: revenue → temporary.
  - Insurance Expense: expense → temporary.
- Closing process for a typical sole proprietorship:
  a) Close revenue: Debit Fees Earned, Credit Income Summary.
  b) Close expenses: Debit Income Summary, Credit Utilities Expense; Debit Income Summary, Credit Insurance Expense; etc.
  c) Close Income Summary to Capital: if credit balance (net income), Debit Income Summary, Credit Capital.
  d) Close drawings (if any) to Capital: Debit Capital, Credit Drawings.
- Prepaid Insurance is not included in these closing entries because it is not an expense account; it appears on the balance sheet as an asset and carries forward.

3. Intermediate “calculation” or entry examples
- Close Fees Earned: Debit Fees Earned, Credit Income Summary.
- Close Utilities Expense: Debit Income Summary, Credit Utilities Expense.
- Close Insurance Expense: Debit Income Summary, Credit Insurance Expense.
- Prepaid Insurance: no closing entry (may have an adjusting entry to record insurance expense, e.g., Debit Insurance Expense, Credit Prepaid Insurance, but still Prepaid Insurance itself is not closed).

4. Why the correct answer is correct
Prepaid Insurance is an asset (permanent account) and therefore is not closed to the capital account at year-end. It remains on the balance sheet and is carried forward.

5. Why the other options are incorrect
- Utilities Expense and Insurance Expense are expense accounts (temporary) and are closed to Income Summary, then to Capital.  
- Fees Earned is a revenue account (temporary) and is closed to Income Summary, then to Capital.

6. Conclusion
Therefore, Prepaid Insurance is the account that will not be closed to the capital account at year-end, which matches the provided correct answer: Prepaid Insurance.

Which of the following accounts will not be closed to the capital account at the end of the year? Single choice

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