Chapter 5, Problem 1CP

1.

To determine

Prepare closing entries for ABA Spa.

Explanation of Solution

Journal entry: Journal entry is a set of economic events which can be measured in monetary terms. These are recorded chronologically and systematically.

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. 1. Close the revenue accounts to Income Summary account.
2. 2. Close the expense accounts to Income Summary account.
3. 3. Close the Income Summary account and transfer the net income or net loss balance to the Capital account.
4. 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
			Depreciation Expense, Office Equipment	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.

To determine

Post the closing entries to ledger accounts.

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    Accumulated Depreciation, Office Equipment           ACCOUNT NO. 125
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.

To determine

Prepare a post-closing trial balance for ABA Spa as at June 30, 20--.

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)