Chapter 3, Problem 70APSA

Problem 3-70B Comprehensive Problem: Reviewing the Accounting Cycle

Wilburton Riding Stables provides stables, care for animals, and grounds for riding and showing horses. The account balances at the beginning of 2019 were:

During 2019, the following transactions occurred:

1. Wilburton provided animal care services, all on credit, for $210,300. Wilburton rented stables to customers for $20,500 cash. Wilburton rented its grounds to individual riders, groups, and show organizations for $41,800 cash.
2. There remains $15,600 of accounts receivable to be collected at December 31, 2019.
3. Feed in the amount of $62,900 was purchased on credit and debited to the supplies
4. Straw was purchased for $7,400 cash and debited to the supplies account.
5. Wages payable at the beginning of 2019 were paid early in 2019. Wages were earned and paid during 2019 in the amount of $12,000.
6. The income taxes payable at the beginning of 2019 were paid early in 2019.
7. Payments of $73,000 were made to creditors for supplies previously purchased on credit.
8. One year’s interest at 9% was paid on the note payable on July 1, 2019.
9. During 2019, Jon Wilburton, a principal stockholder, purchased a horse for his Wife, Jennifer, to ride. The horse cost $7,000, and Wilburton used his personal credit to purchase it. The horse is stabled at the Wilburton home rather than at the riding stables.
10. Property taxes were paid on the land and buildings in the amount of S17,000.
11. Dividends were declared and paid in the amount Of

The following data are available for adjusting entries:

• Supplies (feed and straw) in the amount of $30,400 remained at year end.

• Annual depreciation on the buildings is $6,000.

• Annual depreciation on the equipment is

• Wages of $4,000 were unrecorded and unpaid at year end.

• Interest for 6 months at 9% per year on the note is unpaid and unrecorded at year end.

• Income taxes of $16,500 were unpaid and unrecorded at year end.

Required:

1. Post the 2019 beginning balances to T-accounts. Prepare journal entries for Transactions a through j and post the journal entries to T-accounts, adding any new T-accounts you need.
2. Prepare the adjustments and post the adjustments to the T-accounts, adding any new T-accounts you need.
3. Prepare an income statement.
4. Prepare a retained earnings statement.
5. Prepare a classified balance sheet
6. Prepare closing entries.
7. CONCEPTUAL CONNECTION Did you include Transaction g among Tarkington’s 2019 journal entries? Why or why not?

To determine

To record:Journal entries and prepare T accounts to post those entries.

Introduction: Journal entries provide a record of the financial activities undertaken within an organization. Journal entries helps in preparation of financial statements of a company.

Explanation of Solution

Journalizing:

Journalizing is the process of recording the transactions of an organization in a chronological order. Based on these journal entries recorded, the accounts are posted to the relevant ledger accounts.

Accounting rules for journal entries:

• To increase balance of the account: Debit assets, expenses, losses and credit all liabilities, capital, revenue and gains.
• To decrease balance of the account: Credit assets, expenses, losses and debit all liabilities, capital, revenue and gains.

Recording service revenue:

Date	Account Title and Explanation	Post Ref.	Debit($)	Credit($)
	Cash		686,838
	Accounts receivables		2,256,700
	Service revenue			2,943,538
	(to recordservice revenue)

   Table (1)

• Since cash is an asset, asset is increased. Hence, cashaccount is debited.
• Since accounts receivables is anasset, asset is increased. Hence, accounts receivablesaccount is debited.
• Since service revenue is an income, income is increased. Hence, service revenue account is credited.

Recording receipt from accounts receivables:

Date	Account Title and Explanation	Post Ref.	Debit($)	Credit($)
	Cash		286,172
	Accounts receivable			286,172
	(to record receipt of accounts receivables)

   Table (2)

• Since cash is an asset, asset is increased. Hence, cashaccount is debited.
• Since accounts receivables is anasset and it decreased. Hence, accounts receivablesaccount is credited.

Recording prepaid advertising:

Date	Account Title and Explanation	Post Ref.	Debit($)	Credit($)
	Prepaid advertising		138,100
	Cash			138,100
	(to record unearned income)

   Table (3)

• Since prepaid advertising is an asset, asset is increased. Hence, prepaid advertisingaccount is debited.
• Since cash is an asset, asset is decreased. Hence, cashaccount is credited.

Recording purchase of supplies:

Date	Account Title and Explanation	Post Ref.	Debit($)	Credit($)
	Supplies		27,200
	Accounts payable			27,200
	(to record purchase of supplies)

   Table (4)

• Since supplies is an asset, asset is increased. Hence, suppliesaccount is debited.
• Since accounts payable is aliability, liability is increased. Hence, accounts payable account is credited.

Recording repayment of accounts payable:

Date	Account Title and Explanation	Post Ref.	Debit($)	Credit($)
	Accounts payable $\left(\$17,600-\$5,600\right)$		12,000
	Cash			12,000
	(to record repayment of accounts payable)

   Table (5)

• Since accounts payable is aliability, liability is decreased. Hence, accounts payableaccount is debited.
• Since cash is an asset, asset is decreased. Hence, cashaccount is credited.

Recording cash paid for wages:

Date	Account Title and Explanation	Post Ref.	Debit($)	Credit($)
	Wages payable		30,200
	Wages expense		666,142
	Cash			696,342
	(to record payment of wages)

   Table (6)

• Since wages payable is aliability, liability is decreased. Hence, wages payableaccount is debited.
• Since wages expense is an expense, expense is increased. Hence, wages expenseaccount is credited.
• Since cash is an asset, asset is decreased. Hence, cashaccount is credited.

Recording withdrawal of cash for personal purposes:

Date	Account Title and Explanation	Post Ref.	Debit($)	Credit($)
	Drawings		42,000
	Cash			42,000
	(to record drawing)

   Table (7)

• Since drawing is capital, capital is decreased. Hence, drawingaccount is debited.
• Since cash is an asset, asset is decreased. Hence, cashaccount is credited.

Recording interest expense:

Date	Account Title and Explanation	Post Ref.	Debit($)	Credit($)
	Interest expense		30,000
	Cash			30,000
	(to record interest expense)

   Table (8)

• Since interest expense is an expense, expense is decreased. Hence, interest expenseaccount is debited.
• Since cash is an asset, asset is decreased. Hence, cashaccount is credited.

Recording property taxes:

Date	Account Title and Explanation	Post Ref.	Debit($)	Credit($)
	Property taxes		170,000
	Cash			170,000
	(to record property taxes)

   Table (9)

• Since property taxes is an expense, expense is increased. Hence, property taxes account is debited.
• Since cash is an asset, asset is decreased. Hence, cashaccount is credited.

Recording dividend payment:

Date	Account Title and Explanation	Post Ref.	Debit($)	Credit($)
	Dividend		25,000
	Cash			25,000
	(to record dividend payment)

   Table (10)

• Since dividend is an expense, expense is increased. Hence, dividend account is debited.
• Since cash is an asset, asset is decreased. Hence, cashaccount is credited.

Working Notes:

Computation of interest payable:

$\begin{array}{c}\text{Interest}\text{payable}=\text{Note}\text{payable}\times \text{Interest}\text{rate}\times \text{Period}\\ \text{=\$1,000,000}\times 6\text{\%}\times \frac{6}{12}\\ =\$30,000\end{array}$

Preparation of cash account in general ledger:

Cash
Date	Particular	Post Ref.	Debit($)	Credit($)	Balance($)
	Balance		92,100		92,100
	Service revenue		686,838		778,938
	Accounts receivable		286,172		1,065,110
	Prepaid advertisement			138,100	927,010
	Accounts payable			12,000	915,010
	Wages payable			30,200	884,810
	Wages expenses			666,142	218,668
	Drawings			42,000	176,668
	Interest expense			30,000	146,668
	Property tax			1,70,000	(23332)
	Dividend			25,000	(48,332)

   Table (11)

Preparation of accounts receivable account in general ledger:

Accounts receivable
Date	Particular	Post Ref.	Debit($)	Credit($)	Balance($)
	Balance		361,500		361,500
	Service revenue		2,256,700		2,618,200
	Cash			286,172	2,332,028

   Table (12)

Preparation of supplies account in general ledger:

Supplies
Date	Particular	Post Ref.	Debit($)	Credit($)	Balance($)
	Balance		24,600		24,600
	Accounts payable		27,200		51,800

   Table (13)

Preparation of prepaid advertising account in general ledger:

Prepaid advertising
Date	Particular	Post Ref.	Debit($)	Credit($)	Balance($)
	Balance		2,000		2,000
	Cash		138,100		140,100

   Table (14)

Preparation of building account in general ledger:

Building
Date	Particular	Post Ref.	Debit($)	Credit($)	Balance($)
	Balance		2,190,000		2,190,000

   Table (15)

Preparation of accumulated depreciation account in general ledger:

Accumulated depreciation-Building
Date	Particular	Post Ref.	Debit($)	Credit($)	Balance($)
	Balance			280,000	$\left(280,000\right)$

   Table (16)

Preparation of equipment account in general ledger:

Equipment
Date	Particular	Post Ref.	Debit($)	Credit($)	Balance($)
	Balance		795,000		795,000

   Table (17)

Preparation of accumulated depreciation account in general ledger:

Accumulated depreciation-Equipment
Date	Particular	Post Ref.	Debit($)	Credit($)	Balance($)
	Balance			580,000	$\left(580,000\right)$

   Table (18)

Preparation of land account in general ledger:

Land
Date	Particular	Post Ref.	Debit($)	Credit($)	Balance($)
	Balance		304,975		304.975

   Table (19)

Preparation of accounts payable account in general ledger:

Accounts payable
Date	Particular	Post Ref.	Debit($)	Credit($)	Balance($)
	Balance			17,600	17,600
	Supplies			27,200	44,800
	Cash		12,000		32,800

   Table (20)

Preparation of wages payable account in general ledger:

Wages payable
Date	Particular	Post Ref.	Debit($)	Credit($)	Balance($)
	Balance			30,200	$\left(30,200\right)$
	Cash		30,200		0

   Table (21)

Preparation of notes payable account in general ledger:

Notes payable
Date	Particular	Post Ref.	Debit($)	Credit($)	Balance($)
	Balance			1,000,000	$\left(1,000,000\right)$

   Table (22)

Preparation of common stock account in general ledger:

Common stock
Date	Particular	Post Ref.	Debit($)	Credit($)	Balance($)
	Balance			1,400,000	$\left(1,400,000\right)$

   Table (23)

Preparation of retained earnings account in general ledger:

Retained earnings
Date	Particular	Post Ref.	Debit($)	Credit($)	Balance($)
	Balance			462,375	$\left(462,375\right)$

   Table (24)

Preparation of service revenue account in general ledger:

Service revenue
Date	Particular	Post Ref.	Debit($)	Credit($)	Balance($)
	Accounts receivable			2,256,700	$\left(2,256,700\right)$
	Cash			686,838	$\left(2,943,538\right)$

   Table (25)

Preparation of wages expense account in general ledger:

Wages expense
Date	Particular	Post Ref.	Debit($)	Credit($)	Balance($)
	Cash		666,142		666,142

   Table (26)

Preparation of drawing account in general ledger:

Drawing
Date	Particular	Post Ref.	Debit($)	Credit($)	Balance($)
	Cash		42,000		42,000

   Table (27)

Preparation of interest expense account in general ledger:

Interest expense
Date	Particular	Post Ref.	Debit($)	Credit($)	Balance($)
	Cash		30,000		30,000

   Table (28)

Preparation of property tax account in general ledger:

Property tax expense
Date	Particular	Post Ref.	Debit($)	Credit($)	Balance($)
	Cash		170,000		170,000

   Table (29)

Preparation of dividend account in general ledger:

Dividend expense
Date	Particular	Post Ref.	Debit($)	Credit($)	Balance($)
	Cash		25,000		25,000

   Table (30)

To determine

To record:Adjusting entries. Also, post the adjustment entries in the respective T accounts.

Introduction: Adjusting entries are made at the end of reporting period at the time of preparation of financial statements. Adjusting entries are recorded to reflect the correct picture of financial position of the organization in the financial statements.

Explanation of Solution

Recording adjustment of supplies:

Date	Account Title and Explanation	Post Ref.	Debit($)	Credit($)
	Supplies Expense $\left(\$51,800-\$13,685\right)$		38,115
	Supplies			38,115
	(to record adjustment of supplies)

   Table (31)

• Since supplies expense is an expense, expense is increased. Hence, supplies expense account is debited.
• Since supplies is an asset, asset is decreased. Hence, supplies account is credited.

Recording depreciation expense:

Date	Account Title and Explanation	Post Ref.	Debit($)	Credit($)
	Depreciation -Building		70,000
	Accumulated depreciation-Building			70,000
	(to record depreciation expense)

   Table (32)

• Since depreciation is an expense, expense is increased. Hence, depreciation-Building account is debited.
• Since accumulated depreciation is a contra asset, contra asset is increased. Hence, accumulated depreciation-Building account is credited.

Recording depreciation expense:

Date	Account Title and Explanation	Post Ref.	Debit($)	Credit($)
	Depreciation -Equipment		145,000
	Accumulated depreciation-Equipment			145,000
	(to record depreciation expense)

   Table (33)

• Since depreciation is an expense, expense is increased. Hence, depreciation-Equipment account is debited.
• Since accumulated depreciation is a contra asset, contra asset is increased. Hence, accumulated depreciation-Equipment account is credited.

Recording wages payable:

Date	Account Title and Explanation	Post Ref.	Debit($)	Credit($)
	Wages expense		60,558
	Wages payable			60,558
	(to record wages expense)

   Table (34)

• Since wages expense is an expense, expense is increased. Hence, wages expense account is debited.
• Since wages payable is a liability, liability is increased. Hence, wages payable account is credited.

Recording interest expense:

Date	Account Title and Explanation	Post Ref.	Debit($)	Credit($)
	Interest expense		30,000
	Interest Payable			30,000
	(to record interest expense)

   Table (35)

• Since interestexpense is an expense, expense is increased. Hence, interestexpense account is debited.
• Since interest payable is a liability, liability is increased. Hence, interest payable account is credited.

Recording adjustment of prepaid advertisement:

Date	Account Title and Explanation	Post Ref.	Debit($)	Credit($)
	Advertising Expense $\left(\$140,100-\$14,874\right)$		125,226
	Prepaid advertising			125,226
	(to record advertising adjustment)

   Table (36)

• Sinceadvertising expense is an expense, expense is increased. Hence, advertising expense account is debited.
• Since prepaid advertising is an asset, asset is decreased. Hence, prepaid advertising account is credited.

Recording income tax expense:

Date	Account Title and Explanation	Post Ref.	Debit($)	Credit($)
	Income tax expense		482,549
	Income tax payable			482,549
	(to record income tax expense)

   Table (37)

• Since income tax is an expense, expense is increased. Hence, income tax account is debited.
• Since income tax payable is a liability, liability is increased. Hence, income tax payable account is credited.

Preparation of cash account in general ledger:

Cash
Date	Particular	Post Ref.	Debit($)	Credit($)	Balance($)
	Balance		92,100		92,100
	Service revenue		686,838		778,938
	Accounts receivable		286,172		1,065,110
	Prepaid advertisement			138,100	927,010
	Accounts payable			12,000	915,010
	Wages payable			30,200	884,810
	Wages expenses			666,142	218,668
	Drawings			42,000	176,668
	Interest expense			30,000	146,668
	Property tax			1,70,000	(23332)
	Dividend			25,000	(48,332)

   Table (38)

Preparation of accounts receivable account in general ledger:

Accounts receivable
Date	Particular	Post Ref.	Debit($)	Credit($)	Balance($)
	Balance		361,500		361,500
	Service revenue		2,256,700		2,618,200
	Cash			286,172	2,332,028

   Table (39)

Preparation of supplies account in general ledger:

Supplies
Date	Particular	Post Ref.	Debit($)	Credit($)	Balance($)
	Balance		24,600		24,600
	Accounts payable		27,200		51,800
	Supplies expense			38,115	13,685

   Table (40)

Preparation of prepaid advertising account in general ledger:

Prepaid advertising
Date	Particular	Post Ref.	Debit($)	Credit($)	Balance($)
	Balance		2,000		2,000
	Cash		138,100		140,100
	Advertising expense			125,226	14,874

   Table (41)

Preparation of building account in general ledger:

Building
Date	Particular	Post Ref.	Debit($)	Credit($)	Balance($)
	Balance		2,190,000		2,190,000

   Table (42)

Preparation of accumulated depreciation account in general ledger:

Accumulated depreciation-Building
Date	Particular	Post Ref.	Debit($)	Credit($)	Balance($)
	Balance			280,000	$\left(280,000\right)$
	Depreciation			70,000	$\left(350,000\right)$

   Table (43)

Preparation of equipment account in general ledger:

Equipment
Date	Particular	Post Ref.	Debit($)	Credit($)	Balance($)
	Balance		795,000		795,000

   Table (44)

Preparation of accumulated depreciation account in general ledger:

Accumulated depreciation-Equipment
Date	Particular	Post Ref.	Debit($)	Credit($)	Balance($)
	Balance			580,000	$\left(580,000\right)$
	Depreciation			145,000	$\left(725,000\right)$

   Table (45)

Preparation of land account in general ledger:

Land
Date	Particular	Post Ref.	Debit($)	Credit($)	Balance($)
	Balance		304,975		304.975

   Table (46)

Preparation of accounts payable account in general ledger:

Accounts payable
Date	Particular	Post Ref.	Debit($)	Credit($)	Balance($)
	Balance			17,600	$\left(17,600\right)$
	Supplies			27,200	$\left(44,800\right)$
	Cash		12,000		$\left(32,800\right)$

   Table (47)

Preparation of interest payable account in general ledger:

Interest payable
Date	Particular	Post Ref.	Debit($)	Credit($)	Balance($)
	Interest expense			30,000	$\left(30,000\right)$

   Table (48)

Preparation of wages payable account in general ledger:

Wages payable
Date	Particular	Post Ref.	Debit($)	Credit($)	Balance($)
	Balance			30,200	$\left(30,200\right)$
	Cash		30,200		0
	Wages expense			60,558	$\left(60,558\right)$

   Table (49)

Preparation of income tax payable account in general ledger:

Income tax payable
Date	Particular	Post Ref.	Debit($)	Credit($)	Balance($)
	Income tax expense			482,549	$\left(482,549\right)$

   Table (50)

Preparation of notes payable account in general ledger:

Notes payable
Date	Particular	Post Ref.	Debit($)	Credit($)	Balance($)
	Balance			1,000,000	$\left(1,000,000\right)$

   Table (51)

Preparation of common stock account in general ledger:

Common stock
Date	Particular	Post Ref.	Debit($)	Credit($)	Balance($)
	Balance			1,400,000	$\left(1,400,000\right)$

   Table (52)

Preparation of retained earnings account in general ledger:

Retained earnings
Date	Particular	Post Ref.	Debit($)	Credit($)	Balance($)
	Balance			462,375	$\left(462,375\right)$

   Table (53)

Preparation of service revenue account in general ledger:

Service revenue
Date	Particular	Post Ref.	Debit($)	Credit($)	Balance($)
	Accounts receivable			2,256,700	$\left(2,256,700\right)$
	Cash			686,838	$\left(2,943,538\right)$

   Table (54)

Preparation of wages expense account in general ledger:

Wages expense
Date	Particular	Post Ref.	Debit($)	Credit($)	Balance($)
	Cash		666,142		666,142
	Wages payable		60,558		726,700

   Table (55)

Preparation of drawing account in general ledger:

Drawing
Date	Particular	Post Ref.	Debit($)	Credit($)	Balance($)
	Cash		42,000		42,000

   Table (56)

Preparation of interest expense account in general ledger:

Interest expense
Date	Particular	Post Ref.	Debit($)	Credit($)	Balance($)
	Cash		30,000		30,000
	Interest payable		30,000		60,000

   Table (57)

Preparation of property tax account in general ledger:

Property tax expense
Date	Particular	Post Ref.	Debit($)	Credit($)	Balance($)
	Cash		170,000		170,000

   Table (58)

Preparation of dividend account in general ledger:

Dividend expense
Date	Particular	Post Ref.	Debit($)	Credit($)	Balance($)
	Cash		25,000		25,000

   Table (59)

Preparation of supplies expense in general ledger:

Supplies expense
Date	Particular	Post Ref.	Debit($)	Credit($)	Balance($)
	Supplies		38,115		38,115

   Table (60)

Preparation of depreciation expense account in general ledger:

Depreciation-building expense
Date	Particular	Post Ref.	Debit($)	Credit($)	Balance($)
	Accumulated depreciation		70,000		70,000

   Table (61)

Preparation of depreciation expense account in general ledger:

Depreciation-equipment expense
Date	Particular	Post Ref.	Debit($)	Credit($)	Balance($)
	Accumulated depreciation		145,000		145,000

   Table (62)

Preparation of advertising expense in general ledger:

Advertising expense
Date	Particular	Post Ref.	Debit($)	Credit($)	Balance($)
	Prepaid advertising		125,226		125,226

   Table (63)

Preparation of income tax expense in general ledger:

Income tax expense
Date	Particular	Post Ref.	Debit($)	Credit($)	Balance($)
	Income tax payable		482,549		482,549

   Table (64)

To determine

To prepare:Income statement.

Introduction: Income statement is prepared to ascertain net income of a company for a period. Net income shows operating efficiency of a company.

Explanation of Solution

Preparation of income statement for the year ending 31^st December,2019:

CompanyA
Income Statement
	Amount ($)	Amount ($)
Revenues:
Service revenue	2,943,538
Total Revenue		2,943,538
Expenses:
Wages expense	726,700
Advertising expense	125,226
Interest expense	60,000
Supplies expense	38,115
Property tax	170,000
Depreciation-building expense	70,000
Depreciation-equipment expense	145,000
Income tax expense	482,549
Total Expenses		1,817,590
Net Income		1,125,948

   Table (65)

To determine

To prepare:Statement of retained earnings.

Introduction: Statement of retained earnings shows the net impact on retained earnings of the company, in a given period.

Explanation of Solution

Preparation of statement of retained earnings as on 31^st December,2019:

Company A
Statement of Retained Earning
	Amount($)	Amount($)
Owner’s Equity opening balance	462,375
Add: Capital introduced by owner
Add: Net income	1,125,948
Total:		1,588,323
Less: Withdrawals		$\left(42,000\right)$
Less: Dividend		$\left(25,000\right)$
Closing Balance		1,521,323

   Table (66)

To determine

To prepare:Balance sheet of the company at the end of the accounting period.

Introduction: Balance sheet shows the status of assets and liabilities of the company, in which total assets equates with total liabilities and equity.

Explanation of Solution

Preparation of balance sheet as on 31^st December,2019:

Company A
Balance Sheet
	Amount ($)	Amount($)
Liabilities and Owners Equity
Current Liabilities
Accounts Payable	32,800
Wages Payable	60,558
Interest Payable	30,000
Income tax payable	482,549
Total Current Liabilities		605,907
Non-Current Liabilities
Note Payable (due in 2023)	1,000,000
Total Non-Current Liabilities		1,000,000
Total Liabilities
Common Stock	1,400,000
Retained Earnings	1,521,323	2,921,323
Total Liabilities and Owner’s Equity		4,527,230
Current Assets
Cash	(48,332)
Accounts Receivable	2,332,028
Supplies	13,685
Prepaid advertising	14,874
Total Current Assets		2,312,255
Property, Plant and Equipment
Building	2,190,000
Less: accumulated depreciation	$\left(350,000\right)$
Equipment	795,000
Less: accumulated depreciation	$\left(725,000\right)$
Land	304975
Total Property, Plant and Equipment		2,214,975
Total Assets		4,527,230

   Table (67)

To determine

To record:closing journal entries.

Introduction: Closing entries are posted to close all the temporary accounts of the accounting books. Closing entries zeros the balances of income statement items, drawings, and dividends.

Explanation of Solution

Recording closing entry for expense accounts:

Date	Account Title and Explanation	Post Ref.	Debit($)	Credit($)
	Income summary		1,817,590
	Wages expense			726,700
	Interest expense			60,000
	Propert tax expense			170,000
	Supplies expense			38,115
	Depreciation-building expense			70,000
	Depreciation-equipment expense			145,000
	Advertising expense			125,226
	Income tax expense			482,549
	(to record closing of expense accounts)

   Table (68)

• Since income summary is a temporary income account, temporary income is decreased. Hence, income summary account is debited.
• Since wages expense is an expense, expense is decreased. Hence, wagesexpenseaccount is credited.
• Since interest expense is an expense, expense is decreased. Hence, interestexpense account is credited.
• Since property tax is an expense, expense is decreased. Hence, property tax account is credited.
• Since supplies expense is an expense, expense is decreased. Hence, suppliesexpenseaccount is credited.
• Since depreceiation expense is an expense, expense is decreased. Hence, depreceiation -building expenseaccount is credited.
• Since depreceiation expense is an expense, expense is decreased. Hence, depreceiation-equipmentexpenseaccount is credited.
• Since advertising expense is an expense, expense is decreased. Hence, advertisingexpenseaccount is credited.
• Since income tax is an expense, expense is decreased. Hence, income tax account is credited.

Recording closing entry for revenue accounts:

Date	Account Title and Explanation	Post Ref.	Debit($)	Credit($)
	Sales revenue		2,943,538
	Income summary			2,943,538
	(to record closing of revenue account)

   Table (69)

• Since sales revenue is an income, income is decreased. Hence, sales revenue account is debited.
• Since income summary is a temporary income account, temporary income is increased. Hence, income summary account is credited.

Recording transfer of income summary account:

Date	Account Title and Explanation	Post Ref.	Debit($)	Credit($)
	Income summary		1,125,948
	Retained earnings			1,125,948
	(to record closing entry)

   Table (70)

• Since income summary is a temporary income account, temporary income is decreased. Hence, income summary account is debited.
• Since retained earnings is areserve, reserve is increased. Hence, retained earnings account is credited.

Transfering drawings and dividends to retained earnings:

Date	Account Title and Explanation	Post Ref.	Debit($)	Credit($)
	Retained earnings		67,000
	Drawings			42,000
	Dividend			25,000
	(to record closing entry)

   Table (71)

• Since retained earnings is areserve, reserve is decreased. Hence, retained earnings account is debited.
• Since drawings is capital, capital is increased. Hence, drawingss account is credited.
• Since dividends is expense, expense is decreased. Hence, dividends account is credited.

To determine

Whether the given transaction relating to personal expense should be recorded in the books or not.

Introduction:Personal expenses are incurred by the owners for their personal useby utilizing the cash held within the company.

Explanation of Solution

Personal expenses should also be recorded in the books of the company because these expenses are incurred by using the cash of company. In case, such expenses are not included in the books then , cash account would not show the correct balance.

Personal expenses are shown as drawings by the owners. It is reduced from the equity component of the balance sheet by reducing the retained earnings.