Chapter 6, Problem 6E

To determine

Prepare closing entries for the given ledger accounts.

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.

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		Depreciation Expense, Equipment	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.

$\begin{array}{c}\text{Net income = Revenue–Expenses}\\ \text{=\$187,230–\$126,680}\\ \text{=\$60,550}\end{array}$

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.

To determine

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)