Which of the following characteristics do sales, cost of goods sold, and expenses have in common?
options: a.They are reported in the income statement b.They are temporary accounts that are zeroed out with closing entries c.They are classes of transactions d.All of the above
The correct answer and explanation is:
Correct Answer: d. All of the above
Explanation:
Sales, cost of goods sold (COGS), and expenses share several important characteristics within the accounting cycle. All three are reported in the income statement, classified as temporary accounts, and considered classes of transactions.
Firstly, they are reported in the income statement. The income statement is a financial report that summarizes a company’s revenues and expenses over a specific period. Sales represent the revenue earned from goods or services sold. COGS reflects the direct costs tied to the production of the goods sold. Expenses cover various other costs such as rent, utilities, and salaries. These three elements determine the company’s net income or loss.
Secondly, they are temporary accounts that are closed at the end of the accounting period. Unlike permanent accounts like assets and liabilities, temporary accounts are used to accumulate data for a single accounting period. After financial statements are prepared, the balances of these accounts are transferred to retained earnings through closing entries. This process resets the accounts to zero, preparing them for the next period’s data.
Thirdly, they are all classes of transactions. In accounting, a class of transactions refers to a group of financial activities that are recorded in a similar manner. Sales transactions record income from operations. COGS transactions record the cost related to generating that income. Expense transactions track outflows related to operating the business. Grouping them into classes helps organize financial data and supports accurate reporting.
In summary, sales, COGS, and expenses are related in their treatment within the accounting system. They all impact net income, are part of the income statement, are cleared each period, and are categorized for reporting and analysis purposes. Therefore, the correct answer is d. All of the above.