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Accounting (Text Only)

26th Edition
Carl Warren + 2 others
ISBN: 9781285743615

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BuyFindarrow_forward

Accounting (Text Only)

26th Edition
Carl Warren + 2 others
ISBN: 9781285743615
Textbook Problem
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Closing entries with net loss

Mira Services Co. offers its services to individuals desiring to improve their personal images. After the accounts have been adjusted at October 31, the end of the fiscal year, the following balances were taken from the ledger of Mira Services Co.:

Bonnie Mira, Capital $910,000
Bonnie Mira, Drawing 16,000
Fees Earned 519,300
Wages Expense 488,000
Rent Expense $72,000
Supplies Expense 11,900
Miscellaneous Expense 14,250

Journalize the four entries required to close the accounts.

To determine

Closing entries

Closing entries are recorded in order to close the temporary accounts such as incomes and expenses by transferring them to the permanent accounts. It is passed at the end of the accounting period, to transfer the final balance.

Rules of Debit and Credit:

  • Debit, the revenue account and owners capital account balance. In addition debit owners capital account if it suffer loss (net loss)
  • Credit, the expense account, owners’ capital if it earns income (net income) and owners’ drawing account balance.

To Journalize: The closing entries for MS Company.

Explanation

Closing entry for revenue account:

Date Accounts title and Explanation Post Ref.

Debit

($)

Credit

($)

October 31 Fees Earned (OE–)   519,300  
  Income Summary (OE+)     519,300
  (To close the revenue account )      

Table (1)

Description:

  • Fees earned are a revenue account. Since the amount of revenue is closed to Income Summary account. Therefore, it is debited.
  • Income Summary account is a temporary account. This account is credited to close the revenue value.

Closing entry for expense account:

Date Accounts title and Explanation Post Ref.

Debit

($)

Credit

($)

October 31 Income Summary (OE–)   586,150  
  Wages Expense (OE+)     488,000
  Rent Expense (OE+)     72,000
  Supplies Expense (OE+)     11,900
  Miscellaneous Expense (OE+)     14,250
  (To close the expenses account.      

Table (2)

Description:

  • Income Summary account is a temporary account. This account is debited to close the expense value.
  • Wages Expense, Rent Expense, Supplies Expense, and Miscellaneous Expense are expense accounts. Since the amount of expenses are closed to Income Summary account. Therefore, it is credited.

Closing entry for transferring the income summary to owners’ capital:

Date Accounts title and Explanation Post Ref.

Debit

($)

Credit

($)

October 31 BM’s Capital (OE–)   66,850  
  Income Summary (OE+)     66,850
  (To close balance of income summary are  transferred to owners’ capital account)      

Table (3)

Description:

  • The balance of income summary (net income or net loss) is transferred to owners’ capital account...

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