Concept explainers
1.
Prepare closing entries for ABA Spa.
1.
Explanation of Solution
Debit and credit rules:
- Debit an increase in asset account, increase in expense account, decrease in liability account, and decrease in
stockholders’ equity accounts. - Credit decrease in asset account, increase in revenue account, increase in liability account, and increase in stockholders’ equity accounts.
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 to Income Summary account.
- 2. Close the expense accounts 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.
Entry 1:
Date | Account Titles and Explanations | Post. Ref. | Debit ($) | Credit ($) | ||
June | 30 | Income from Services | 411 | 18,347 | ||
Income Summary | 313 | 18,347 | ||||
(Record closing of revenue to Income Summary account) |
Table (1)
Description:
- Income from Services is a revenue account. Revenue account has a normal credit balance. Since revenue is closed to Income Summary account, the account is 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.
Entry 2:
Date | Account Titles and Explanations | Post. Ref. | Debit ($) | Credit ($) | ||
June | 30 | Income Summary | 313 | 11,325.38 | ||
Wages Expense | 611 | 7,759.50 | ||||
Rent Expense | 612 | 1,650.00 | ||||
Office Supplies Expense | 613 | 238.00 | ||||
Spa Supplies Expense | 614 | 287.00 | ||||
Laundry Expense | 615 | 84.00 | ||||
Advertising Expense | 616 | 397.00 | ||||
Utilities Expense | 617 | 473.00 | ||||
Insurance Expense | 618 | 160.00 | ||||
619 | 10.00 | |||||
Depreciation Expense, Spa Equipment | 620 | 64.88 | ||||
Miscellaneous Expense | 630 | 112.00 | ||||
(Record closing of expenses to Income Summary account) |
Table (2)
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.
- All expense accounts have a normal debit balance. Since expenses are closed to Income Summary account, the accounts are credited.
Entry 3:
Date | Account Titles and Explanations | Post. Ref. | Debit ($) | Credit ($) | ||
June | 30 | Income Summary | 7,111.62 | |||
AV, Capital | 7,111.62 | |||||
(Record closing of net income to capital account) |
Table (3)
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.
Entry 4:
Date | Account Titles and Explanations | Post. Ref. | Debit ($) | Credit ($) | ||
June | 30 | AV, Capital | 1,850 | |||
AV, Drawing | 1,850 | |||||
(Record closing of drawing to capital account) |
Table (4)
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.
2.
2.
Explanation of Solution
Post the closing entries journalized in Part (1) into the ledger accounts of general ledger.
ACCOUNT Cash ACCOUNT NO. 111 | |||||||
Date | Item | Post. Ref. | Debit ($) | Credit ($) | Balance | ||
Debit ($) | Credit ($) | ||||||
June | 1 | 1 | 15,000.00 | 15,000.00 | |||
3 | 1 | 960.00 | 14,040.00 | ||||
3 | 1 | 2,000.00 | 12,040.00 | ||||
3 | 1 | 1,650.00 | 10,390.00 | ||||
5 | 1 | 248.00 | 10,142.00 | ||||
5 | 1 | 112.00 | 10,030.00 | ||||
7 | 1 | 1,847.50 | 8,182.50 | ||||
7 | 1 | 2,630.00 | 10,812.50 | ||||
11 | 1 | 873.00 | 9,939.50 | ||||
14 | 1 | 3,703.00 | 13,642.50 | ||||
14 | 1 | 1,847.50 | 11,795.00 | ||||
18 | 1 | 1,200.00 | 10,595.00 | ||||
21 | 1 | 4,758.00 | 15,353.00 | ||||
21 | 1 | 1,847.50 | 13,505.50 | ||||
25 | 1 | 73.00 | 13,432.50 | ||||
28 | 1 | 1,847.50 | 11,585.00 | ||||
28 | 1 | 84.00 | 11,501.00 | ||||
30 | 1 | 5,992.00 | 17,493.00 | ||||
30 | 1 | 1,850.00 | 15,643.00 | ||||
30 | 1 | 225.00 | 15,418.00 | ||||
30 | 1 | 248.00 | 15,170.00 |
Table (5)
ACCOUNT Accounts Receivable ACCOUNT NO. 113 | |||||||
Date | Item | Post. Ref. | Debit ($) | Credit ($) | Balance | ||
Debit ($) | Credit ($) | ||||||
June | 7 | 1 | 325.00 | 325.00 | |||
14 | 1 | 486.00 | 811.00 | ||||
21 | 1 | 344.00 | 1,155.00 | ||||
30 | 1 | 109.00 | 1,264.00 |
Table (6)
ACCOUNT Office Supplies ACCOUNT NO. 114 | |||||||
Date | Item | Post. Ref. | Debit ($) | Credit ($) | Balance | ||
Debit ($) | Credit ($) | ||||||
June | 5 | 1 | 248 | 248 | |||
5 | 1 | 120 | 368 | ||||
30 | Adjusting | 4 | 238 | 130 |
Table (7)
ACCOUNT Spa Supplies ACCOUNT NO. 115 | |||||||
Date | Item | Post. Ref. | Debit ($) | Credit ($) | Balance | ||
Debit ($) | Credit ($) | ||||||
June | 3 | 1 | 492 | 492 | |||
30 | Adjusting | 4 | 287 | 205 |
Table (8)
ACCOUNT Prepaid Insurance ACCOUNT NO. 117 | |||||||
Date | Item | Post. Ref. | Debit ($) | Credit ($) | Balance | ||
Debit ($) | Credit ($) | ||||||
June | 3 | 1 | 960 | 960 | |||
30 | Adjusting | 4 | 160 | 800 |
Table (9)
ACCOUNT Office Equipment ACCOUNT NO. 124 | |||||||
Date | Item | Post. Ref. | Debit ($) | Credit ($) | Balance | ||
Debit ($) | Credit ($) | ||||||
June | 5 | 1 | 318 | 318 | |||
5 | 1 | 832 | 1,150 |
Table (10)
ACCOUNT | |||||||
Date | Item | Post. Ref. | Debit ($) | Credit ($) | Balance | ||
Debit ($) | Credit ($) | ||||||
June | 30 | Adjusting | 1 | 10.00 | 10.00 |
Table (11)
ACCOUNT Spa Equipment ACCOUNT NO. 128 | |||||||
Date | Item | Post. Ref. | Debit ($) | Credit ($) | Balance | ||
Debit ($) | Credit ($) | ||||||
June | 1 | 1 | 3,158 | 3,158 | |||
3 | 1 | 4,235 | 7,393 |
Table (12)
ACCOUNT Accumulated Depreciation, Spa Equipment ACCOUNT NO. 129 | |||||||
Date | Item | Post. Ref. | Debit ($) | Credit ($) | Balance | ||
Debit ($) | Credit ($) | ||||||
June | 30 | Adjusting | 1 | 64.88 | 64.88 |
Table (13)
ACCOUNT Accounts Payable ACCOUNT NO. 211 | |||||||
Date | Item | Post. Ref. | Debit ($) | Credit ($) | Balance | ||
Debit ($) | Credit ($) | ||||||
June | 3 | 1 | 2,235 | 2,235 | |||
3 | 1 | 492 | 2,727 | ||||
5 | 1 | 318 | 3,045 | ||||
5 | 1 | 397 | 3,442 | ||||
5 | 1 | 832 | 4,274 | ||||
5 | 1 | 120 | 4,394 | ||||
11 | 1 | 873 | 3,521 | ||||
18 | 1 | 1,200 | 2,321 | ||||
25 | 1 | 73 | 2,248 |
Table (14)
ACCOUNT Wages Payable ACCOUNT NO. 212 | |||||||
Date | Item | Post. Ref. | Debit ($) | Credit ($) | Balance | ||
Debit ($) | Credit ($) | ||||||
June | 30 | Adjusting | 1 | 369.50 | 369.50 |
Table (15)
ACCOUNT AV, Capital ACCOUNT NO. 311 | |||||||
Date | Item | Post. Ref. | Debit ($) | Credit ($) | Balance | ||
Debit ($) | Credit ($) | ||||||
June | 1 | 1 | 15,000.00 | 15,000.00 | |||
1 | 1 | 3,158.00 | 18,158.00 | ||||
30 | Closing | 5 | 7,11.62 | 25,269.62 | |||
30 | Closing | 5 | 1,850.00 | 23,419.62 |
Table (16)
ACCOUNT AV, Drawing ACCOUNT NO. 312 | |||||||
Date | Item | Post. Ref. | Debit ($) | Credit ($) | Balance | ||
Debit ($) | Credit ($) | ||||||
June | 30 | 1 | 1,850 | 1,850 | |||
30 | Closing | 5 | 1,850 | 0 |
Table (17)
ACCOUNT Income from Services ACCOUNT NO. 411 | |||||||
Date | Item | Post. Ref. | Debit ($) | Credit ($) | Balance | ||
Debit ($) | Credit ($) | ||||||
June | 7 | 1 | 2,630 | 2,630 | |||
7 | 1 | 325 | 2,955 | ||||
14 | 1 | 3,703 | 6,658 | ||||
14 | 1 | 486 | 7,144 | ||||
21 | 1 | 4,758 | 11,902 | ||||
21 | 1 | 344 | 12,246 | ||||
30 | 1 | 5,992 | 18,238 | ||||
30 | 1 | 109 | 18,347 | ||||
30 | Closing | 5 | 18,347 | 0 |
Table (18)
ACCOUNT Wages Expense ACCOUNT NO. 611 | |||||||
Date | Item | Post. Ref. | Debit ($) | Credit ($) | Balance | ||
Debit ($) | Credit ($) | ||||||
June | 7 | 1 | 1,847.50 | 1,847.50 | |||
14 | 1 | 1,847.50 | 3,695.00 | ||||
21 | 1 | 1,847.50 | 5,542.50 | ||||
28 | 1 | 1,847.50 | 7,390.00 | ||||
30 | Adjusting | 4 | 369.50 | 7,759.50 | |||
30 | Closing | 5 | 7,759.50 | 0 |
Table (19)
ACCOUNT Rent Expense ACCOUNT NO. 612 | |||||||
Date | Item | Post. Ref. | Debit ($) | Credit ($) | Balance | ||
Debit ($) | Credit ($) | ||||||
June | 3 | 1 | 1,650 | 1,650 | |||
30 | Closing | 5 | 1,650 | 0 |
Table (20)
ACCOUNT Office Supplies Expense ACCOUNT NO. 613 | |||||||
Date | Item | Post. Ref. | Debit ($) | Credit ($) | Balance | ||
Debit ($) | Credit ($) | ||||||
June | 30 | Adjusting | 1 | 238 | 238 | ||
30 | Closing | 238 | 0 |
Table (21)
ACCOUNT Spa Supplies Expense ACCOUNT NO. 614 | |||||||
Date | Item | Post. Ref. | Debit ($) | Credit ($) | Balance | ||
Debit ($) | Credit ($) | ||||||
June | 30 | Adjusting | 1 | 287 | 287 | ||
30 | Closing | 5 | 287 | 0 |
Table (22)
ACCOUNT Laundry Expense ACCOUNT NO. 615 | |||||||
Date | Item | Post. Ref. | Debit ($) | Credit ($) | Balance | ||
Debit ($) | Credit ($) | ||||||
June | 28 | 1 | 84 | 84 | |||
30 | Closing | 5 | 84 | 0 |
Table (23)
ACCOUNT Advertising Expense ACCOUNT NO. 616 | |||||||
Date | Item | Post. Ref. | Debit ($) | Credit ($) | Balance | ||
Debit ($) | Credit ($) | ||||||
June | 5 | 1 | 397 | 397 | |||
30 | Closing | 397 | 0 |
Table (24)
ACCOUNT Utilities Expense ACCOUNT NO. 617 | |||||||
Date | Item | Post. Ref. | Debit ($) | Credit ($) | Balance | ||
Debit ($) | Credit ($) | ||||||
June | 30 | 1 | 225 | 225 | |||
30 | 1 | 248 | 473 | ||||
30 | Closing | 5 | 473 | 0 |
Table (25)
ACCOUNT Insurance Expense ACCOUNT NO. 618 | |||||||
Date | Item | Post. Ref. | Debit ($) | Credit ($) | Balance | ||
Debit ($) | Credit ($) | ||||||
June | 30 | Adjusting | 1 | 160 | 160 | ||
30 | Closing | 5 | 160 | 0 |
Table (26)
ACCOUNT Depreciation Expense, Office Equipment ACCOUNT NO. 619 | |||||||
Date | Item | Post. Ref. | Debit ($) | Credit ($) | Balance | ||
Debit ($) | Credit ($) | ||||||
June | 30 | Adjusting | 1 | 10 | 10 | ||
30 | Closing | 5 | 10 | 0 |
Table (27)
ACCOUNT Depreciation Expense, Spa Equipment ACCOUNT NO. 620 | |||||||
Date | Item | Post. Ref. | Debit ($) | Credit ($) | Balance | ||
Debit ($) | Credit ($) | ||||||
June | 30 | Adjusting | 1 | 64.88 | 64.88 | ||
30 | Closing | 5 | 64.88 | 0 |
Table (28)
ACCOUNT Promotional Expense ACCOUNT NO. 630 | |||||||
Date | Item | Post. Ref. | Debit ($) | Credit ($) | Balance | ||
Debit ($) | Credit ($) | ||||||
June | 5 | 1 | 112 | 112 | |||
30 | Closing | 112 | 112 |
Table (29)
3.
Prepare a post-closing
3.
Explanation of Solution
Post-closing trial balance: Post-closing trial balance is a summary of the entire 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 June 30, 20--.
ABA Spa | ||
Post-Closing Trial Balance | ||
October 31, 20-- | ||
Cash | $15,170.00 | |
Accounts Receivables | 1,264.00 | |
Office Supplies | 130.00 | |
Spa Supplies | 205.00 | |
Prepaid Insurance | 800.00 | |
Office Equipment | 1,150.00 | |
Accumulated Depreciation, Office Equipment | $10.00 | |
Spa Equipment | 7,393.00 | |
Accumulated Depreciation, Spa Equipment | 64.88 | |
Accounts Payable | 2,248.00 | |
Wages Payable | 369.50 | |
AV, Capital | 23,419.62 | |
$26,112.00 | $26,112.00 |
Table (30)
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