What happens to the net income or loss at the end of the year on the income statement?

At the end of the year, the net income or loss as reported on the income statement is closed out to retained earnings in the equity section of the balance sheet. This process is a part of the accounting cycle, specifically during the closing entries phase.

When a company generates a net income, this amount increases the retained earnings, reflecting accumulated profits that can be reinvested in the business or distributed to shareholders. Conversely, if there is a net loss, it decreases retained earnings, indicating a detriment to accumulated profits. Retained earnings represent the total profits that have been reinvested in the company rather than paid out as dividends, and they accumulate over time.

This practice provides a clear picture of the company's financial health and ongoing profitability, allowing stakeholders to assess how well the business is performing over time. It also forms the basis for future financial decisions, including potential reinvestments or dividend payments.

In contrast, the other options do not accurately represent the accounting treatment of net income or loss. Cash reserves, short-term assets, and dividends are all important financial aspects, but they do not receive the closing balance of net income directly. The retained earnings adjustment is the fundamental and correct action taken at year-end for reflecting net income or loss