Tag Archives: Chapter 4

Closing Journal Entries

Closing Journal Entries
Revenue and expense accounts are temporary accounts and closed at the end of each period.
The balances of revenue and expense accounts are transferred to the income summary account.
The balance of income summary account represents net income.
The balance of income summary account is then transferred to the retained earnings account.
Assets, liabilities and equity accounts are permanent accounts that are not closed at the end of each period.
Closing entries are the journal entries that are prepared to transfer the balances of revenue and expense accounts to the income summary account, and transfer the balance of income summary account to retained earnings.

 

Example of Closing Journal Entries


Review Questions
1. Which accounts are temporary accounts?
Revenue and expense accounts are temporary accounts.
2. Which accounts are permanent accounts?
Asset, liability and equity accounts are permanent accounts.
3. Which accounts are closed at the end of each period?
Temporary accounts are closed at the end of each period?
4. When the revenue and expense accounts are closed, to which account are those balances are transferred?
The balances of revenue and expense accounts are transferred to the income summary account.
5. What does the balance of the income summary account represent?
The balance of the income summary account represents net income for the period.
6. To which account is the balance of the income summary account transferred?
The balance of the income summary account is transferred to the retained earnings account.
7. Is retained earnings account a permanent account?
Retained earnings is an equity account, which is a permanent account.

Exercise


 

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Steps of Accounting Cycle

Steps of accounting cycle
1. Prepare journal entries
2. Post to the ledger
3. Prepare unadjusted trial balance
4. Prepare adjusting journal entries
5. Prepare adjusted trial balance
6. Prepare financial statements
7. Prepare closing entries
8. Prepare post-closing trial balance
T-Accounts
1. Left side of a T-account represents debit.
2. Right side of a T-account represents credit.
3. Normal balance
Trial Balance
1. List of all accounts
2. Total debit balances = Total credit balances
3. Checking whether debit and credit balances are equal.
4. Trial balance lists of all accounts with the balance either on debit or credit side.
5. Total debit balances should be equal to total credit balances.
6. The purpose of trial balance is to check whether debit and credit balances are equal.
Exercise
Entity H had the following transaction in December 20×1
1. December 1, owner invested $120,000 in the business.
2. December 1, paid $5,500 rent for December 20×1.
3. December 2, purchased equipment and issued a $36,000 note payable in May 20×2.
4. December 8, purchased merchandise at $71,000 on account.
5. December 15, sold merchandise at $60,000 on account.
6. December 15, the cost of goods sold was $42,000.
7. December 19, paid $50,000 accounts payable to the supplier.
8. December 30, collected $45,000 accounts receivable from the customer.
9. December 31, paid $4,500 salaries for December 20×1.
10. December 31, depreciation expense for equipment was $600.
11. December 31, owner withdrew $10,000 cash for personal use.












 

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Accounting Equation

Accounting equation shows that the total assets should be equal to the total liabilities and stockholders’ equity.
The left side of accounting equation represents the resources of an entity.
The right side of accounting equation shows who has claims to the resources.
[Equation 1] Assets = Liabilities + Equity
As an extension to the basic accounting equation, revenues and expenses can be added. Revenues increase the owners’ equity and expenses decrease the owners’ equity.
[Equation 2]  Assets = Liabilities + Equity + Revenues – Expenses
By adding expenses to both sides, the equation 2 can be rearranged to the equation 3 as follows:
[Equation 3]  Assets + Expenses = Liabilities + Equity + Revenues
The equation 2 shows that assets and expenses are on the left side of the equation. Liabilities, equity and revenues are on the right side of the equation.

Review Questions

1. Entity A had the following balances of assets and liabilities at December 31, 20×1.
Asset = $100,000
Liabilities = $60,000
What is the amount of stockholders’ equity at December 31, 20×1?
 Assets = Liabilities + Stockholders’ Equity
$100,000 = $60,000 + Stockholders’ Equity
Stockholders’ Equity = $100,000 – $60,000 = $40,000

2. Entity B had the following balances of assets and stockholders’ equity at December 31, 20×1.
Asset = $200,000
Stockholders’ Equity = $120,000
What is the amount of stockholders’ equity at December 31, 20×1?
 Assets = Liabilities + Stockholders’ Equity
$200,000 = Liabilities + $120,000
Liabilities = $200,000 – $120,000 = $80,000

3. Entity C had the following balances at January 1, 20×1.
Assets = $140,000
Liabilities = $50,000
Stockholders’ Equity = $90,000

At December 31, 20×1, the balances changed to the following amounts.
Assets = $190,000
Liabilities = $70,000
Stockholders’ Equity = to be determined

The only transactions that affected stockholders’ equity during 20×1 were revenues and expenses.
If Entity C recorded $110,000 revenues, what is the amount of expenses during 20×1?

 At January 1, 20×1
Assets = Liabilities + Stockholders’ Equity
$140,000 = $50,000 + $90,000

 At December 31, 20×1
Assets = Liabilities + Stockholders’ Equity
$190,000 = $70,000 + Stockholders’ Equity
Stockholders’ equity at December 31, 20×1 = $190,000 – $70,000 = $120,000

 During 20×1, stockholders’ equity increased $30,000 from $90,000 to $120,000.
Because revenues and expenses are the only transactions that affected stockholders’ equity during 20×1, $30,000 represents net income.
Net income = Revenues – Expenses
$30,000 = $110,000 – Expenses
Expenses = $110,000 – $30,000 = $80,000

 

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