At the end of a fiscal year, are income statement accounts reduced to zero balance?

• A. Not necessarily
• B. They roll over
• C. True
• D. False

Answer: (C)

Temporary income statement accounts are closed at year-end so they start the next period with zero balances. During closing, revenues and gains are transferred out and expenses and losses are transferred out, with the net result (income or loss) then moved into Retained Earnings. This resets the income statement accounts to zero while updating equity for the period's results. Permanent accounts like assets, liabilities, and equity accounts (other than Retained Earnings) carry their balances forward. For example, if there is net income, the Revenue and Expense accounts are cleared to zero, and Retained Earnings is increased accordingly. That’s why the statement is true.