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If a company fails to make closing entries at 30 June, what problem arises on the July statement of profit or loss?
ACash will be overstated by the net income
BJuly figures will be understated by the dividend
CThe trial balance will refuse to balance
DJuly figures will erroneously include June amounts
Answer & Solution
Correct answer: D. July figures will erroneously include June amounts
1. Without closing, the June revenue and expense balances are never reset to zero.
2. July transactions are then added on top of the leftover June balances.
3. The running totals copied to July's statement therefore include June amounts, overstating July results.
4. The trial balance can still balance with this error (C is wrong); Cash is unaffected (D); the dividend is unrelated (B).
5. Therefore July figures would erroneously include June amounts.
_Source: Jonick, Principles of Financial Accounting (CC BY-SA 4.0), §1.4.4 "Closing Entries", p.27_
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