Concept explainers
Prepare closing entries for the given ledger accounts.
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.
Close the revenue accounts to Income Summary account.
GENERAL JOURNAL | Page 4 | |||||
Date | Account Titles and Explanations | Post. Ref. | Debit ($) | Credit ($) | ||
2019 | Fees Income | 401 | 187,230 | |||
March | 31 | Income Summary | 399 | 187,230 | ||
(Record closing of revenue to Income Summary account) |
Table (1)
Description:
- Fees income 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.
Close the expense accounts to Income Summary account.
GENERAL JOURNAL | Page 4 | |||||
Date | Account Titles and Explanations | Post. Ref. | Debit ($) | Credit ($) | ||
2019 | Income Summary | 399 | 126,680 | |||
March | 31 | 510 | 10,580 | |||
Insurance Expense | 511 | 5,700 | ||||
Rent Expense | 514 | 16,500 | ||||
Salaries Expense | 517 | 83,000 | ||||
Supplies Expense | 518 | 2,800 | ||||
Telephone Expense | 519 | 3,400 | ||||
Utilities Expense | 523 | 4,700 | ||||
(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.
- Depreciation Expense, Insurance Expense, Rent Expense, Salaries Expense, Supplies Expense, Telephone Expense, and Utilities Expense are expense accounts. Expense account has a normal debit balance. Since expenses are closed to Income Summary account, the accounts are credited.
Close the net income to Income Summary account.
GENERAL JOURNAL | Page 4 | |||||
Date | Account Titles and Explanations | Post. Ref. | Debit ($) | Credit ($) | ||
Income Summary | 399 | 60,550 | ||||
AH, Capital | 301 | 60,550 | ||||
(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.
- AH, Capital is a capital account. Since net income is transferred to the account, the value increased, and an increase in capital is credited.
Working Note 1:
Compute net income.
Close the Drawing account to Capital account.
GENERAL JOURNAL | Page 4 | |||||
Date | Account Titles and Explanations | Post. Ref. | Debit ($) | Credit ($) | ||
AH, Capital | 301 | 6,500 | ||||
AH, Drawing | 302 | 6,500 | ||||
(Record closing of drawing to capital account) |
Table (4)
Description:
- AH, Capital is a capital account. Since drawings is transferred to the account, the value decreased, and a decrease in capital is debited.
- AH, Drawing is a capital account. Since drawings is transferred, the account is credited to reverse the previously debited effect.
Post the above closing entries in the general ledger.
Explanation of Solution
Post the above closing entries in the general ledger.
ACCOUNT AH, Capital ACCOUNT NO. 301 | |||||||
Date | Description | Post. Ref. | Debit ($) | Credit ($) | Balance | ||
Debit ($) | Credit ($) | ||||||
March | 31 | Balance | 65,000 | ||||
31 | Closing | J4 | 60,550 | 125,550 | |||
31 | Closing | J4 | 6,500 | 119,050 |
Table (5)
ACCOUNT AH, Drawing ACCOUNT NO. 302 | |||||||
Date | Description | Post. Ref. | Debit ($) | Credit ($) | Balance | ||
Debit ($) | Credit ($) | ||||||
March | 31 | Balance | 6,500 | ||||
31 | Closing | J4 | 6,500 | - |
Table (6)
ACCOUNT Income Summary ACCOUNT NO. 399 | |||||||
Date | Description | Post. Ref. | Debit ($) | Credit ($) | Balance | ||
Debit ($) | Credit ($) | ||||||
March | 31 | Closing | J4 | 187,230 | 187,230 | ||
31 | Closing | J4 | 126,680 | 60,550 | |||
31 | Closing | J4 | 60,550 | - |
Table (7)
ACCOUNT Insurance Expense ACCOUNT NO. 511 | |||||||
Date | Description | Post. Ref. | Debit ($) | Credit ($) | Balance | ||
Debit ($) | Credit ($) | ||||||
March | 31 | Balance | 5,700 | ||||
31 | Closing | J4 | 5,700 | - |
Table (8)
ACCOUNT Rent Expense ACCOUNT NO. 514 | |||||||
Date | Description | Post. Ref. | Debit ($) | Credit ($) | Balance | ||
Debit ($) | Credit ($) | ||||||
March | 31 | Balance | 16,500 | ||||
31 | Closing | J4 | 16,500 | - |
Table (9)
ACCOUNT Salaries Expense ACCOUNT NO. 517 | |||||||
Date | Description | Post. Ref. | Debit ($) | Credit ($) | Balance | ||
Debit ($) | Credit ($) | ||||||
March | 31 | Balance | 83,000 | ||||
31 | Closing | J4 | 83,000 | - |
Table (10)
ACCOUNT Supplies Expense ACCOUNT NO. 518 | |||||||
Date | Description | Post. Ref. | Debit ($) | Credit ($) | Balance | ||
Debit ($) | Credit ($) | ||||||
March | 31 | Balance | 2,800 | ||||
31 | Closing | J4 | 2,800 | - |
Table (11)
ACCOUNT Telephone Expense ACCOUNT NO. 519 | |||||||
Date | Description | Post. Ref. | Debit ($) | Credit ($) | Balance | ||
Debit ($) | Credit ($) | ||||||
March | 31 | Balance | 3,400 | ||||
31 | Closing | J4 | 3,400 | - |
Table (12)
ACCOUNT Utilities Expense ACCOUNT NO. 523 | |||||||
Date | Description | Post. Ref. | Debit ($) | Credit ($) | Balance | ||
Debit ($) | Credit ($) | ||||||
March | 31 | Balance | 4,700 | ||||
31 | Closing | J4 | 4,700 | - |
Table (13)
ACCOUNT Depreciation Expense - Equipment ACCOUNT NO. 523 | |||||||
Date | Description | Post. Ref. | Debit ($) | Credit ($) | Balance | ||
Debit ($) | Credit ($) | ||||||
March | 31 | Balance | 10,580 | ||||
31 | Closing | J4 | 10,580 | - |
Table (14)
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Chapter 6 Solutions
COLLEGE ACCOUNTING: CONTEMP APPROACH
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