Question

The following information is from the Income Statement of the Sunland Laundry Service: $7540 Revenues Service Revenues Expenses Salaries and wages expense $ 2840 Advertising expense 580 Rent expense 350 Supplies expense 230 Insurance expense 120 Total expenses 4120 Net income $3420 The entry to close Income Summary includes a: O debit to Retained Earnings for $3420. credit to Common Stock for $3420. debit to Income Summary for $3420. credit to Income Summary for $3420.

Answer 1

Answer

• Income Summary account balance = Net Income $ 3420 = Credit balance.
• This credit balance is closed by:
  debiting Income Summary account, and
  crediting Retained earnings account.
• Hence, Correct Answer = Option #3: Debit to Income Summary for $ 3420
• Conceptual notes

General Concepts regarding Closing entries:

#1:Temporary accounts, like Revenue accounts, have normal CREDIT balances, and hence they are closed by DEBITING the account.

#2:Temporary accounts, like Expense accounts or Contra revenue accounts, have normal DEBIT balances, and hence they are closed by CREDITING the account.

#3: In case of Net Income, Income Summary account has a CREDIT balance, and in order to close the Income Summary account, we DEBIT the account, and Credit Retained earnings/Owner's Capital

#4: In case of Net Loss, Income Summary account has a DEBIT balance, and in order to close the Income Summary account, we CREDIT the account, and Debit Retained earnings/Owner's Capital

#5: Dividend accounts have normal DEBIT balance, and are closed by CREDITING them, and debiting Retained earnings account.

#6: Drawings or Withdrawal account have a normal DEBIT balance, and hence closed by CREDITING the account, and debiting Owner's Capital account.