In what order should the closing entries be prepared?

The correct order for preparing closing entries is to first close the revenue accounts, then the expense accounts, followed by transferring the net income (or loss) to the income summary, and finally, closing the drawing account.

Starting with the revenue accounts ensures that all income generated during the accounting period is accounted for. Next, closing the expense accounts allows for determining the net income or loss for the period by subtracting the total expenses from total revenues. Once the net income has been calculated, it is transferred to the income summary account to reflect the overall performance of the business. Lastly, closing the drawing account, which reflects the owner's withdrawals, brings the owner's equity to the proper end-of-period balance.

This sequence helps ensure that all temporary accounts are properly reset to zero for the new accounting period, allowing for accurate tracking of income and expenses in the subsequent period.