Chapter 5, Problem 1CP

After the adjusting entries are recorded and posted and the financial statements have been prepared, you are ready to record the closing entries. Closing entries zero out the temporary owner’s equity accounts (revenue(s), expenses(s), and Drawing). This process transfers the net income or net loss and the withdrawals to the Capital account. In addition, the closing process prepares the records for the new fiscal period.

Required

1. 1. Journalize the dosing entries in the general journal.

   (If you are using Working Papers to prepare the closing entries, enter your transactions beginning on page 5.)

2. 2. Post the closing entries to the general ledger accounts.

   (Skip this step if you are using CLGL.)

3. 3. Prepare a post-dosing trial balance as of October 31, 20--.

Check Figures

1. 1. Debit to Income Summary second entry, $12,023.25
2. 2. Post-closing trial balance total, $37,420.00

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 ($)	Credit ($)
October	31	Income from Services		411	19,200
			Income Summary	313		19,200
		(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 ($)	Credit ($)
October	31	Income Summary		313	12,023.25
			Wages Expense	611		8,715.00
			Rent Expense	612		1,000.00
			Office Supplies Expense	613		230.00
			Spa Supplies Expense	614		430.00
			Laundry Expense	615		105.00
			Advertising Expense	616		415.00
			Utilities Expense	617		710.00
			Insurance Expense	618		140.00
			Depreciation Expense, Office Equipment	619		13.25
			Depreciation Expense, Spa Equipment	620		150.00
			Miscellaneous Expense	630		115.00
		(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 ($)	Credit ($)
October	31	Income Summary			7,196.75
			AV, Capital			7,196.75
		(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 ($)	Credit ($)
October	31	AV, Capital			1,500
			AV, Drawing			1,500
		(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.

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 ($)	Credit ($)
October	1		1	25,000		25,000
	3		1		840	24,160
	3		1		3,000	21,160
	3		1		1,000	20,160
	5		1		230	19,930
	5		1		115	19,815
	7		1		2,075	17,740
	7		1	3,465		21,205
	11		1		1,000	20,205
	14		1	3,307		23,512
	14		1		2,075	21,437
	18		1		1,200	20,237
	21		1	4,587		24,824
	21		1		2,075	22,749
	25		1		350	22,399
	28		1		2,075	20,324
	28		1		105	20,219
	31		1	6,588		26,807
	31		1		1,500	25,307
	31		1		325	24,982
	31		1		385	24,597

Table (5)

ACCOUNT    Accounts Receivable                                    ACCOUNT NO. 113
Date		Item	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
October	7		1	350		350
	14		1	468		818
	21		1	345		1,163
	31		1	110		1,273

Table (6)

ACCOUNT    Office Supplies                                              ACCOUNT NO. 114
Date		Item	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
October	5		1	230		230
	5		1	125		355
	31	Adjusting			230	125

Table (7)

ACCOUNT    Spa Supplies                                                 ACCOUNT NO. 115
Date		Item	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
October	3		1	685		685
	31	Adjusting			430	255

Table (8)

ACCOUNT    Prepaid Insurance                                          ACCOUNT NO. 117
Date		Item	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
October	3		1	840		840
	31	Adjusting			140	700

Table (9)

ACCOUNT    Office Equipment                                            ACCOUNT NO. 124
Date		Item	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
October	5		1	520		520
	5		1	825		1,345

Table (10)

ACCOUNT    Accumulated Depreciation, Office Equipment           ACCOUNT NO. 125
Date		Item	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
October	31	Adjusting	1		13.25		13.25

Table (11)

ACCOUNT    Spa Equipment                                                ACCOUNT NO. 128
Date		Item	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
October	1		1	3,575		3,575
	3		1	5,550		9,125

Table (12)

ACCOUNT    Accumulated Depreciation, Spa Equipment               ACCOUNT NO. 129
Date		Item	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
October	31	Adjusting	1		150		150

Table (13)

ACCOUNT    Accounts Payable                                         ACCOUNT NO. 211
Date		Item	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
October	3		1		2,550		2,550
	3		1		685		3,235
	5		1		520		3,755
	5		1		415		4,170
	5		1		825		4,995
	5		1		125		5,120
	11		1	1,000			4,120
	18		1	1,200			2,920
	25		1	350			2,570

Table (14)

ACCOUNT    Wages Payable                                              ACCOUNT NO. 212
Date		Item	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
October	31	Adjusting	1		415		415

Table (15)

ACCOUNT    AV, Capital                                                    ACCOUNT NO. 311
Date		Item	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
October	1		1		25,000.00		25,000.00
	1		1		3,575.00		28,575.00
	31	Closing			7,196.75		35,771.75
	31	Closing		1,500.00			34,271.75

Table (16)

ACCOUNT    AV, Drawing                                                  ACCOUNT NO. 312
Date		Item	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
October	31		1	1,500		1,500
	31	Closing			1,500	0

Table (17)

ACCOUNT    Income from Services                                   ACCOUNT NO. 411
Date		Item	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
October	7		1		3,465		3,465
	7		1		350		3,815
	14		1		3,307		7,122
	14		1		468		7,590
	21		1		4,587		12,177
	21		1		345		12,522
	31		1		6,588		19,110
	31		1		110		19,220
	31	Closing		19,220			0

Table (18)

ACCOUNT    Wages Expense                                               ACCOUNT NO. 611
Date		Item	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
October	7		1	2,075		2,075
	14		1	2,075		4,150
	21		1	2,075		6,225
	28		1	2,075		8,300
	31	Adjusting		415		8,715
	31	Closing			8,715	0

Table (19)

ACCOUNT    Rent Expense                                                    ACCOUNT NO. 612
Date		Item	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
October	3		1	1,000		1,000
	31	Closing			1,000	0

Table (20)

ACCOUNT    Office Supplies Expense                                  ACCOUNT NO. 613
Date		Item	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
October	31	Adjusting	1	230		230
	31	Closing			230	0

Table (21)

ACCOUNT    Spa Supplies Expense                                       ACCOUNT NO. 614
Date		Item	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
October	31	Adjusting	1	430		430
	31	Closing			430	0

Table (22)

ACCOUNT    Laundry Expense                                             ACCOUNT NO. 615
Date		Item	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
October	28		1	105		105
	31	Closing			105	0

Table (23)

ACCOUNT    Advertising Expense                                             ACCOUNT NO. 616
Date		Item	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
October	5		1	415		415
	31	Closing			415	0

Table (24)

ACCOUNT    Utilities Expense                                             ACCOUNT NO. 617
Date		Item	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
October	31		1	325		325
	31		1	385		710
	31	Closing			710	0

Table (25)

ACCOUNT    Insurance Expense                                            ACCOUNT NO. 618
Date		Item	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
October	31	Adjusting	1	140		140
	31	Closing			140	0

Table (26)

ACCOUNT    Depreciation Expense, Office Equipment                ACCOUNT NO. 619
Date		Item	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
October	31	Adjusting	1	13.25		13.25
	31	Closing			13.25	0

Table (27)

ACCOUNT    Depreciation Expense, Spa Equipment                    ACCOUNT NO. 620
Date		Item	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
October	31	Adjusting	1	150		150
	31	Closing			150	0

Table (28)

ACCOUNT    Promotional Expense                                       ACCOUNT NO. 630
Date		Item	Post. Ref.	Debit ($)	Credit ($)	Balance
						Debit ($)	Credit ($)
October	5		1	115		115
	31	Closing			115	0

Table (29)

To determine

Prepare a post-closing trial balance for ABA Spa as at October 31, 20--.

Explanation of Solution

Post-closing trial balance: Post-closing trial balance is a summary of all the 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 October 31, 20--.

ABA Spa
Post-Closing Trial Balance
October 31, 20--
Cash	$24,597.00
Accounts Receivables	1,273.00
Office Supplies	125.00
Spa Supplies	255.00
Prepaid Insurance	700.00
Office Equipment	1,345.00
Accumulated Depreciation, Office Equipment		$13.25
Spa Equipment	9,125.00
Accumulated Depreciation, Spa Equipment		150.00
Accounts Payable		2,570.00
Wages Payable		415.00
AV, Capital		34,271.75
	$37,420.00	$37,420.00

Table (30)