At the end of each fiscal year, the accounts reflected on the income statement are reduced to a zero balance.

• A. True
• B. False
• C. Sometimes
• D. Never

Answer: (A)

At the end of a fiscal period, revenue and expense accounts—the temporary accounts that appear on the income statement—are closed to zero. This closing process transfers the period’s net result (net income or net loss) to retained earnings, a permanent equity account. By doing this, the income statement accounts reset to zero so the next period can start fresh, while permanent balance sheet accounts carry their balances forward. That’s why the statement is true: income statement accounts are reduced to zero balances as part of the closing process.