Merchandising – Closing entries

Merchandising: Closing entries

After the first two closing entries, the Income Summary account contains the net income for the period. To journalize the third closing entry, net income must first be computed. Net income is the difference between revenues (net sales, in this problem) and expenses.

First, we must compute net sales:

Second, we must compute total expenses. In this problem, there are three expenses: Cost of Goods Sold, Selling Expenses, and General and Administrative Expenses. Compute total expenses:

Finally, we can compute net income:

The third closing entry closes the balance in the Income Summary account to the Capital account. This transfers net income (or net loss) to the Capital Account. The Revenue accounts have already been closed to the Income Summary account. The contra-revenue and expense accounts have already been closed to the Income Summary account. The Income Summary account now contains the net of the revenues, contra-revenues, and expenses, which is net income (or net loss).

Debit Income Summary:
Since in this problem there is net income, the Income Summary account has a credit balance. To close the Income Summary account, we must debit it. The Income Summary account is debited (decreased) for the amount of net income, $2,920.

Credit Capital:
Net income increases Capital, so by completing the third closing entry, we are increasing the Capital account by the amount of net income. The Capital account is credited (increased) for the amount of net income, $2,920.

Therefore, the answer is:

The fourth closing entry closes the Drawing account to the account.

Debit Capital:
Drawing reduces Capital, so we must reduce the Capital account by the amount of Drawing. Capital is debited (decreased) by the amount of Drawing for the year, $16,200.

Credit Drawing:
Drawing is a temporary account with a debit balance. At the end of the year, we close Drawing so that we are able to start accumulating Drawing for the new year. Drawing is credited (increased) for $16,200 as part of the closing process.

Therefore, the answer is:

The second closing entry closes all expense accounts and contra-revenue accounts (both groups are temporary accounts with debit balances) and transfers their balances to the Income Summary account. The accounts that are closed include the contra-revenue accounts, Sales Discounts and Sales Returns and Allowances, and all the expense accounts.

Debit Income Summary:
The balances of all temporary accounts with debit balances (not including Drawing) are transferred to the Income Summary account. The Income Summary account is used only in the closing process to summarize the components of net income (or net loss, if expenses exceed revenues). Income Summary is debited (decreased) for $63,960.

Credit Sales Discounts, and credit Sales Returns and Allowances:
Both of these accounts are temporary contra-revenue accounts, with debit balances. At the end of the year, we close these account balances so that we are able to start accumulating in these accounts for the new year. Sales Discounts and Sales Returns and Allowances are credited (decreased) for $1,010 and $790, respectively, as part of the closing process.

Credit Expense Accounts:
All three of the expense accounts — Cost of Goods Sold, Selling Expenses, and General and Administrative Expenses — are temporary expense accounts with debit balances. At the end of the year, we close these account balances so that we are able to start accumulating in these accounts for the new year. The expense accounts are credited (decreased) for $39,960, $10,600, and $11,600, respectively, as part of the closing process.

Therefore, the answer is: