Concept explainers
It is now August 31. You have journalized and posted the adjustments in the All About You Spa accounting records, and Ms. Valli wants to see financial statements for the last two months (July and August). Then she would like you to prepare the closing entries.
Required
- 1. Prepare an income statement for the two months ended August 31, 20--.
- 2. Prepare a statement of owner’s equity for the two months ended August 31, 20--. Ignore this step if using QuickBooks.
- 3. Prepare a balance sheet as of August 31, 20--.
- 4. Journalize the closing entries in the general journal.
- If you are preparing the closing entries using Working Papers, enter your transactions beginning on page 5.
- 5.
Post the closing entries to the general ledger accounts.- Ignore this step if you are using QuickBooks or CLGL.
- 6. Prepare a post-closing
trial balance as of August 31, 20--.
Check Figures
- 1. Net income, $15,314.18
- 2. A. Valli, Capital (end of period), $67,085.93
- 3. Balance Sheet report total assets, $83,081.33
- 4. Post-closing trial balance total, $83,935.12
1.
Prepare an income statement for ABA Spa for two months ended August 31, 20--.
Explanation of Solution
Income statement: The financial statement which reports revenues and expenses from business operations and the result of those operations as net income or net loss for a particular time period is referred to as income statement.
Prepare an income statement for ABA Spa for two months ended August 31, 20--.
ABA Spa | ||||
Income Statement | ||||
For the Year Ended August 31, 20-- | ||||
Revenue from sales: | ||||
Merchandise sales | $28,261.54 | |||
Less: Sales returns and allowances | $17.46 | |||
Sales discounts | 70.00 | 87.46 | ||
Net sales | $28,714.08 | |||
Cost of goods sold: | ||||
Merchandise inventory, July 1, 20-- | $0.0 | |||
Purchases | $23,344.00 | |||
Less: Purchase returns and allowances | $82.00 | |||
Purchases discounts | 168.00 | 250.00 | ||
Net purchases | 23,094.00 | |||
Add: Freight-in | 975.00 | |||
Delivered cost of purchases | 24,069.00 | |||
Cost of goods available for sale | 24,069.00 | |||
Less: Merchandise inventory, August 31, 20-- |
11,310.00 | |||
Cost of goods sold | 12,759.00 | |||
Gross profit | 15,415.08 | |||
Operating expenses: | ||||
Wages expense | 18,260.00 | |||
Rent expense | 3,000.00 | |||
Office supplies expense | 134.00 | |||
Spa supplies expense | 305.00 | |||
Laundry expense | 110.00 | |||
Advertising expense | 555.00 | |||
Utilities expense | 701.00 | |||
Insurance expense | 233.34 | |||
Depreciation expense, Office equipment |
30.00 | |||
Depreciation expense, Spa equipment | 660.54 | |||
Promotional expense | 400.80 | |||
Total operating expenses | 24,389.68 | |||
Loss from operations | (8,974.60) | |||
Other income: | ||||
Income from services | 24,288.78 | |||
Net income | $15,314.18 |
Table (1)
Thus, the income statement of ABA Spa for two months ended August 31, 20-- is $15,314.18.
2.
Prepare a statement of owners’ equity for ABA Spa for two months ended August 31, 20--.
Explanation of Solution
Statement of owners’ equity: This statement reports the beginning owner’s equity and all the changes which led to ending owners’ equity. Additional capital, net income from income statement is added to, and drawings is deducted from beginning owner’s equity to arrive at the end result, ending owner’s equity.
Prepare a statement of owners’ equity for ABA Spa for two months ended August 31, 20--.
ABA Spa | ||
Statement of Owners’ Equity | ||
For Two Months Ended August 31, 20-- | ||
AV, Capital, July 1, 20-- | $34,271.75 | |
Additional investment | $22,000.00 | |
Net income for the year | 15,314.18 | |
37,314.18 | ||
Less: Withdrawals for the year | (4,500.00) | |
Increase in capital | 32,814.18 | |
MJE, Capital, December 31, 20-- | $67,085.93 |
Table (2)
Thus, the statement of owners’ equity of ABA Spa for two months ended August 31, 2-- reports the capital amount of $67,085.93.
3.
Prepare a balance sheet for ABA Spa (Refer to Table (2) for capital of the owner from the statement of owners’ equity prepared in Part (2)).
Explanation of Solution
Balance sheet: This financial statement reports a company’s resources (assets) and claims of creditors (liabilities) and owners (owners’ equity) over those resources. The resources of the company are assets which include money contributed by owners and creditors. Hence, the main elements of the balance sheet are assets, liabilities, and owners’ equity.
Prepare the balance sheet for ABA Spa as at August 31, 20--.
ABA Spa | |||
Balance Sheet | |||
August 31, 20-- | |||
Assets | |||
Current Assets: | |||
Cash | $44,742.45 | ||
Accounts Receivable | 5,335.01 | ||
Office Supplies | 100.00 | ||
Spa Supplies | 425.00 | ||
Merchandise Inventory | 11,310.00 | ||
Prepaid Insurance | 466.66 | ||
Total Current Assets | $62,379.12 | ||
Property and Equipment: | |||
Office Equipment | $1,740.00 | ||
Less: Accumulated Depreciation | 43.25 | 1,696.75 | |
Spa Equipment | 19,816.00 | ||
Less: Accumulated Depreciation | 810.54 | 19,005.46 | |
Total Property and Equipment | 20,702.21 | ||
Total Assets | $83,081.33 | ||
Liabilities | |||
Current Liabilities: | |||
Accounts Payable | $14,919.00 | ||
Sales Tax Payable | 1,076.40 | ||
Total Current Liabilities | $15,995.40 | ||
Total Liabilities | $15,995.40 | ||
Owners’ Equity | |||
AV, Capital | 67,085.93 | ||
Total Liabilities and Owners’ Equity | $83,081.33 |
Table (3)
Thus, the balance sheet of ABA Spa as at August 31, 20-- reports the total assets, and total liabilities and owners’ equity of $83,081.33.
4.
Prepare closing entries for ABA Spa.
Explanation of Solution
Closing entries: The journal entries prepared to close the temporary accounts to capital account are referred to as closing entries. The revenue, expense, and drawing accounts are referred to as temporary accounts because the information and figures in these accounts is held temporarily and consequently transferred to permanent account at the end of accounting year.
Steps in closing procedure:
- 1. Close the revenue accounts and the income statement accounts with credit balances to Income Summary account.
- 2. Close the expense accounts and the income statement accounts with debit balances to Income Summary account.
- 3. Close the Income Summary account and transfer the net income or net loss balance to the Capital account.
- 4. Close the Drawing account to Capital account.
Prepare closing entries for ABA Spa.
Step 1:
Date | Account Titles and Explanations | Post. Ref. | Debit ($) | Credit ($) | ||
August | 31 | Income from Services | 411 | 24,288.78 | ||
Merchandise Sales | 412 | 28,261.54 | ||||
Purchases Returns and Allowances | 512 | 82.00 | ||||
Purchases Discounts | 513 | 168.00 | ||||
Income Summary | 313 | 52,800.32 | ||||
(Record closing of revenue and income statement accounts with credit balances to Income Summary account) |
Table (4)
Description:
- Income from Services and Merchandise Sales are revenue accounts. Revenue accounts have normal credit balance. Since revenue is closed to Income Summary account, the accounts are debited.
- Purchases Returns and Allowances and Purchase Discounts are contra-cost accounts and have normal credit balances. Since contra-cost accounts are closed to Income Summary account, the accounts are debited.
- Income Summary is a clearing account which closes revenue, expense, drawings, and net of revenues and expenses to capital accounts. The account is credited to hold the transferred balance from revenue account and other income statement accounts with credit balances.
Step 2:
Date | Account Titles and Explanations | Post. Ref. | Debit ($) | Credit ($) | ||
August | 31 | Income Summary | 313 | 48,796.14 | ||
Sales Discounts | 413 | 17.46 | ||||
Sales Returns and Allowances | 414 | 70.00 | ||||
Purchases | 511 | 23,344.00 | ||||
Freight-In | 515 | 975.00 | ||||
Wages Expense | 611 | 18,260.00 | ||||
Rent Expense | 612 | 3,000.00 | ||||
Office Supplies Expense | 613 | 134.00 | ||||
Spa Supplies Expense | 614 | 305.00 | ||||
Laundry Expense | 615 | 110.00 | ||||
Advertising Expense | 616 | 555.00 | ||||
Utilities Expense | 617 | 701.00 | ||||
Insurance Expense | 618 | 233.34 | ||||
Depreciation Expense, Office Equipment | 619 | 30.00 | ||||
Depreciation Expense, Spa Equipment | 620 | 660.54 | ||||
Promotional Expense | 630 | 400.80 | ||||
(Record closing of expenses and income statement accounts with debit balances to Income Summary account) |
Table (5)
Description:
- Income Summary is a clearing account which closes revenue, expense, drawings, and net of revenues and expenses to capital accounts. The account is debited to hold the transferred balance from expense accounts other income statement accounts with debit balances.
- Sales Discounts and Sales Returns and Allowances are contra-revenue accounts and have normal debit balances. Since contra-revenue accounts are closed to Income Summary account, the account is credited.
- All expense accounts have normal debit balance. Since expenses are closed to Income Summary account, the accounts are credited.
Step 3:
Date | Account Titles and Explanations | Post. Ref. | Debit ($) | Credit ($) | ||
August | 31 | Income Summary | 313 | 15,314.18 | ||
AV, Capital | 311 | 15,314.18 | ||||
(Record closing of net income to capital account) |
Table (6)
Description:
- Income Summary is a clearing account which closes revenue, expense, drawings, and net of revenues and expenses to capital accounts. Since net income is closed, the account is reversed, hence, the Income Summary account is debited.
- AV, Capital is a capital account. Since net income is transferred to the account, the value increased, and an increase in capital is credited.
Step 4:
Date | Account Titles and Explanations | Post. Ref. | Debit ($) | Credit ($) | ||
August | 31 | AV, Capital | 311 | 4,500.00 | ||
AV, Drawing | 312 | 4,500.00 | ||||
(Record closing of drawing to capital account) |
Table (7)
Description:
- AV, Capital is a capital account. Since drawings is transferred to the account, the value decreased, and a decrease in capital is debited.
- AV, Drawing is a capital account. Since drawings is transferred, the account is credited to reverse the previously debited effect.
5.
Post the closing entries to ledger accounts.
Explanation of Solution
Post the closing entries journalized in Part (4) into the ledger accounts of general ledger.
ACCOUNT Cash ACCOUNT NO. 111 | |||||||
Date | Item | Post. Ref. | Debit ($) | Credit ($) | Balance | ||
Debit ($) | Credit ($) | ||||||
August | 31 | Balance | ✓ | 44,742.45 |
Table (8)
ACCOUNT Accounts Receivable ACCOUNT NO. 113 | |||||||
Date | Item | Post. Ref. | Debit ($) | Credit ($) | Balance | ||
Debit ($) | Credit ($) | ||||||
August | 31 | Balance | ✓ | 5,335.01 |
Table (9)
ACCOUNT Office Supplies ACCOUNT NO. 114 | |||||||
Date | Item | Post. Ref. | Debit ($) | Credit ($) | Balance | ||
Debit ($) | Credit ($) | ||||||
August | 31 | Balance | ✓ | 234.00 | |||
31 | Adjusting | 134.00 | 100.00 |
Table (10)
ACCOUNT Spa Supplies ACCOUNT NO. 115 | |||||||
Date | Item | Post. Ref. | Debit ($) | Credit ($) | Balance | ||
Debit ($) | Credit ($) | ||||||
August | 31 | Balance | ✓ | 730.00 | |||
31 | Adjusting | 305.00 | 425.00 |
Table (11)
ACCOUNT Merchandise Inventory ACCOUNT NO. 116 | |||||||
Date | Item | Post. Ref. | Debit ($) | Credit ($) | Balance | ||
Debit ($) | Credit ($) | ||||||
August | 31 | Adjusting | 11,310 | 11,310 |
Table (12)
ACCOUNT Prepaid Insurance ACCOUNT NO. 117 | |||||||
Date | Item | Post. Ref. | Debit ($) | Credit ($) | Balance | ||
Debit ($) | Credit ($) | ||||||
August | 31 | Balance | ✓ | 700.00 | |||
31 | Adjusting | 233.34 | 466.66 |
Table (13)
ACCOUNT Office Equipment ACCOUNT NO. 124 | |||||||
Date | Item | Post. Ref. | Debit ($) | Credit ($) | Balance | ||
Debit ($) | Credit ($) | ||||||
August | 31 | Balance | ✓ | 1,740 |
Table (14)
ACCOUNT Accumulated Depreciation, Office Equipment ACCOUNT NO. 125 | |||||||
Date | Item | Post. Ref. | Debit ($) | Credit ($) | Balance | ||
Debit ($) | Credit ($) | ||||||
August | 31 | Balance | ✓ | 13.25 | |||
31 | Adjusting | 30.00 | 43.25 |
Table (15)
ACCOUNT Spa Equipment ACCOUNT NO. 128 | |||||||
Date | Item | Post. Ref. | Debit ($) | Credit ($) | Balance | ||
Debit ($) | Credit ($) | ||||||
August | 31 | Balance | ✓ | 19,816 |
Table (16)
ACCOUNT Accumulated Depreciation, Spa Equipment ACCOUNT NO. 129 | |||||||
Date | Item | Post. Ref. | Debit ($) | Credit ($) | Balance | ||
Debit ($) | Credit ($) | ||||||
August | 31 | Balance | ✓ | 150.00 | |||
31 | Adjusting | 660.54 | 810.54 |
Table (17)
ACCOUNT Accounts Payable ACCOUNT NO. 211 | |||||||
Date | Item | Post. Ref. | Debit ($) | Credit ($) | Balance | ||
Debit ($) | Credit ($) | ||||||
August | 31 | Balance | ✓ | 14,919 |
Table (18)
ACCOUNT Sales Tax Payable ACCOUNT NO. 215 | |||||||
Date | Item | Post. Ref. | Debit ($) | Credit ($) | Balance | ||
Debit ($) | Credit ($) | ||||||
August | 31 | Balance | ✓ | 1,076.40 |
Table (19)
ACCOUNT AV, Capital ACCOUNT NO. 311 | |||||||
Date | Item | Post. Ref. | Debit ($) | Credit ($) | Balance | ||
Debit ($) | Credit ($) | ||||||
August | 31 | Balance | ✓ | 56,271.75 | |||
31 | Closing | 15,314.18 | 71,585.93 | ||||
31 | Closing | 4,500.00 | 67,085.93 |
Table (20)
ACCOUNT AV, Drawing ACCOUNT NO. 312 | |||||||
Date | Item | Post. Ref. | Debit ($) | Credit ($) | Balance | ||
Debit ($) | Credit ($) | ||||||
August | 31 | Balance | ✓ | 4,500 | |||
31 | Closing | 4,500 | 0 |
Table (21)
ACCOUNT Income from Services ACCOUNT NO. 411 | |||||||
Date | Item | Post. Ref. | Debit ($) | Credit ($) | Balance | ||
Debit ($) | Credit ($) | ||||||
August | 31 | Balance | ✓ | 24,288.78 | |||
31 | Closing | 24,288.78 | 0 |
Table (22)
ACCOUNT Merchandise Sales ACCOUNT NO. 412 | |||||||
Date | Item | Post. Ref. | Debit ($) | Credit ($) | Balance | ||
Debit ($) | Credit ($) | ||||||
August | 31 | Balance | ✓ | 28,261.54 | |||
31 | Closing | 28,261.54 | 0 |
Table (23)
ACCOUNT Sales Discounts ACCOUNT NO. 413 | |||||||
Date | Item | Post. Ref. | Debit ($) | Credit ($) | Balance | ||
Debit ($) | Credit ($) | ||||||
August | 31 | Balance | ✓ | 17.46 | |||
31 | Closing | 17.46 | 0 |
Table (24)
ACCOUNT Sales Returns and Allowances ACCOUNT NO. 414 | |||||||
Date | Item | Post. Ref. | Debit ($) | Credit ($) | Balance | ||
Debit ($) | Credit ($) | ||||||
August | 31 | Balance | ✓ | 70.00 | |||
31 | Closing | 70.00 | 0 |
Table (25)
ACCOUNT Purchases ACCOUNT NO. 511 | |||||||
Date | Item | Post. Ref. | Debit ($) | Credit ($) | Balance | ||
Debit ($) | Credit ($) | ||||||
August | 31 | Balance | ✓ | 23,344 | |||
31 | Closing | 23,344 | 0 |
Table (26)
ACCOUNT Purchases Discounts ACCOUNT NO. 512 | |||||||
Date | Item | Post. Ref. | Debit ($) | Credit ($) | Balance | ||
Debit ($) | Credit ($) | ||||||
August | 31 | Balance | ✓ | 82 | |||
31 | Closing | 82 | 0 |
Table (27)
ACCOUNT Purchases Returns and Allowances ACCOUNT NO. 513 | |||||||
Date | Item | Post. Ref. | Debit ($) | Credit ($) | Balance | ||
Debit ($) | Credit ($) | ||||||
August | 31 | Balance | ✓ | 168 | |||
31 | Closing | 168 | 0 |
Table (28)
ACCOUNT Freight-In ACCOUNT NO. 515 | |||||||
Date | Item | Post. Ref. | Debit ($) | Credit ($) | Balance | ||
Debit ($) | Credit ($) | ||||||
August | 31 | Balance | ✓ | 975 | |||
31 | Closing | 975 | 0 |
Table (29)
ACCOUNT Wages Expense ACCOUNT NO. 611 | |||||||
Date | Item | Post. Ref. | Debit ($) | Credit ($) | Balance | ||
Debit ($) | Credit ($) | ||||||
August | 31 | Balance | ✓ | 18,260 | |||
31 | Closing | 18,260 | 0 |
Table (30)
ACCOUNT Rent Expense ACCOUNT NO. 612 | |||||||
Date | Item | Post. Ref. | Debit ($) | Credit ($) | Balance | ||
Debit ($) | Credit ($) | ||||||
August | 31 | Balance | ✓ | 3,000 | |||
31 | Closing | 3,000 | 0 |
Table (31)
ACCOUNT Office Supplies Expense ACCOUNT NO. 613 | |||||||
Date | Item | Post. Ref. | Debit ($) | Credit ($) | Balance | ||
Debit ($) | Credit ($) | ||||||
August | 31 | Adjusting | 134 | 134 | |||
31 | Closing | 134 | 0 |
Table (32)
ACCOUNT Spa Supplies Expense ACCOUNT NO. 614 | |||||||
Date | Item | Post. Ref. | Debit ($) | Credit ($) | Balance | ||
Debit ($) | Credit ($) | ||||||
August | 31 | Adjusting | 305 | 305 | |||
31 | Closing | 305 | 0 |
Table (33)
ACCOUNT Laundry Expense ACCOUNT NO. 615 | |||||||
Date | Item | Post. Ref. | Debit ($) | Credit ($) | Balance | ||
Debit ($) | Credit ($) | ||||||
August | 31 | Balance | ✓ | 110 | |||
31 | Closing | 110 | 0 |
Table (34)
ACCOUNT Advertising Expense ACCOUNT NO. 616 | |||||||
Date | Item | Post. Ref. | Debit ($) | Credit ($) | Balance | ||
Debit ($) | Credit ($) | ||||||
August | 31 | Balance | ✓ | 555 | |||
31 | Closing | 555 | 0 |
Table (35)
ACCOUNT Utilities Expense ACCOUNT NO. 617 | |||||||
Date | Item | Post. Ref. | Debit ($) | Credit ($) | Balance | ||
Debit ($) | Credit ($) | ||||||
August | 31 | Balance | ✓ | 701 | |||
31 | Closing | 701 | 0 |
Table (36)
ACCOUNT Insurance Expense ACCOUNT NO. 618 | |||||||
Date | Item | Post. Ref. | Debit ($) | Credit ($) | Balance | ||
Debit ($) | Credit ($) | ||||||
August | 31 | Balance | ✓ | 233.34 | |||
31 | Closing | 233.34 | 0 |
Table (37)
ACCOUNT Depreciation Expense, Office Equipment ACCOUNT NO. 619 | |||||||
Date | Item | Post. Ref. | Debit ($) | Credit ($) | Balance | ||
Debit ($) | Credit ($) | ||||||
August | 31 | Balance | ✓ | 30 | |||
31 | Closing | 30 | 0 |
Table (38)
ACCOUNT Depreciation Expense, Spa Equipment ACCOUNT NO. 620 | |||||||
Date | Item | Post. Ref. | Debit ($) | Credit ($) | Balance | ||
Debit ($) | Credit ($) | ||||||
August | 31 | Balance | ✓ | 660.54 | |||
31 | Closing | 660.54 | 0 |
Table (39)
ACCOUNT Promotional Expense ACCOUNT NO. 630 | |||||||
Date | Item | Post. Ref. | Debit ($) | Credit ($) | Balance | ||
Debit ($) | Credit ($) | ||||||
August | 31 | Balance | ✓ | 400.80 | |||
31 | Closing | 400.80 | 0 |
Table (40)
6.
Prepare a post-closing trial balance for ABA Spa as at August 31, 20--.
Explanation of Solution
Post-closing trial balance: Post-closing trial balance is a summary of all the asset, liability, and capital accounts and their balances, after the closing entries are prepared. So, post-closing trial balance reports the balances of permanent accounts only.
Prepare a post-closing trial balance for ABA Spa as at August 31, 20--.
ABA Spa | ||
Post-Closing Trial Balance | ||
August 31, 20-- | ||
Cash | $44,742.45 | |
Accounts Receivables | 5,335.01 | |
Office Supplies | 234.00 | |
Spa Supplies | 730.00 | |
Prepaid Insurance | 11,310.00 | |
Office Equipment | 466.66 | |
Accumulated Depreciation, Office Equipment | $43.25 | |
Spa Equipment | 19,816.00 | |
Accumulated Depreciation, Spa Equipment | 810.54 | |
Accounts Payable | 14,919.00 | |
Sales Tax Payable | 1,076.40 | |
AV, Capital | 67,085.93 | |
$83,935.12 | $83,935.12 |
Table (41)
Thus, the post-closing trial balance of ABA Spa shows a debit and credit balance of $83,935.12.
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- Kelly Pitney began her consulting business, Kelly Consulting, on April 1, 2016. The accounting cycle for Kelly Consulting for April, including financial statements, was illustrated in this chapter. During May, Kelly Consulting entered into the following transactions: Instructions 1. The chart of accounts for Kelly Consulting is shown in Exhibit 9, and the post-closing trial balance as of April 30, 2016, is shown in Exhibit 17. For each account in the post-closing trial balance, enter the balance in the appropriate Balance column of a four-column account. Date the balances May 1, 2016, and place a check mark () in the Posting Reference column. Journalize each of the May transactions in a two column journal starting on Page 5 of the journal and using Kelly Consultings chart of accounts. (Do not insert the account numbers in the journal at this time.) 2. Post the journal to a ledger of four-column accounts. 3. Prepare an unadjusted trial balance. 4. At the end of May, the following adjustment data were assembled. Analyze and use these data to complete parts (5) and (6) a. Insurance expired during May is 275. b. Supplies on hand on May 31 are 715. c. Depreciation of office equipment for May is 330. d. Accrued receptionist salary on May 31 is 325. e. Rent expired during May is 1,600. f. Unearned fees on May 31 are 3,210. 5.(Optional) Enter the unadjusted trial balance on an end-of-period spreadsheet and complete the spreadsheet. 6.Journalize and post the adjusting entries. Record the adjusting entries on Page 7 of the journal. 7.Prepare an adjusted trial balance. 8.Prepare an income statement, a statement of owners equity, and a balance sheet. 9.Prepare and post the closing entries. Record the closing entries on Page 8 of the journal. (Income Summary is account #33 in the chart of accounts.) Indicate closed accounts by inserting a line in both the Balance columns opposite the closing entry. 10.Prepare a post-closing trial balance.arrow_forwardThe ledger accounts after adjusting entries for Cortez Services are presented below. a. Journalize the following closing entries and number as steps 1 through 4. b. What is the new balance of J. Cortez, Capital after closing? Show your calculations.arrow_forwardAfter all revenue and expenses have been closed at the end of the fiscal period ended December 31, Income Summary has a debit of 45,550 and a credit of 36,520. On the same date, D. Mau, Drawing has a debit balance of 12,000 and D. Mau, Capital had a beginning credit balance of 63,410. a. Journalize the entries to close the remaining temporary accounts. b. What is the new balance of D. Mau, Capital after closing the remaining temporary accounts? Show your calculations.arrow_forward
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