Question

ACC 610: E 3-16 (closing entries for a corporation) Presented below are selected account balances for Homer Winslow Co as of December 31, 2014.

Instructions: Prepare closing entries for Homer Winslow Co on December 31,2014. (Omit explanations)

Inventory 12/31/14		$60,000		Cost of Goods Sold		$225,700
Common Stock		75,000		Selling Expenses		16,000
Retained Earnings		45,000		Administrative Expenses		38,000
Dividends		18,000		Income Tax Expense		30,000
Sales Returns and Allowances		12,000
Sales Discounts		15,000
Sales Revenue		410,000

Answer 1

Concepts and reason

Transaction: It is an agreement which creates a legal obligation between two or more parties for exchanging the goods or providing the services. The transactions which can be measured in monetary terms are to be recorded in financial books.

Rules of debit and credit have been followed for journalizing the various transactions and these are as follows:

 
‎Debit the Receiver and Credit the Giver: It is used for personal accounts. It indicates when the organization receives something from anyone then, what is received would be debited and the giver would be credited. 

 
‎Debit what comes in and Credit what goes out: It is used for real accounts. It indicates when the organization purchases or to receive any asset then it would be debited and on the other side, when the asset is going out of the organization then, it would be credited.

 
‎Debit all expenses and losses, credit all incomes and gains: It is used in case of a nominal account, and according to this rule all the expenses and losses incurred by the organization would be debited and on the other side, all the incomes and gain of the organization would be credited.

Fundamentals

Journal Entry: Journalizing is the process of recording of transactions in the book of original entry. It gives a complete picture of a business transaction. It is recorded in chronological order. It is the pre-phase for the preparation of ledgers.

Closing Entries: These entries are required to complete the accounting cycle and at the end, transfer the balance of revenue, expenses and withdrawals account to income summary account.

Revenues: It is income that an entity earns from its normal business operations. It reflects the amount which is received by the firm by manufacturing or providing goods and services. Whenever income has been earned or due, the revenue account will be credited.

Expenses: These are the gross outflows incurred by a business entity while carrying out their regular business operations like manufacturing and providing goods and services. Whenever any expense has been due to be incurred, the expense account has been debited.

Retained earnings: It is the portion of income which is not paid to the stockholders in the form of a dividend. The amount of retained earnings is used by the corporation in future for expansion and development. Retained earnings are the account maintained under the category of capital account.

Income Summary Account: At the ending of the accounting period all the revenue accounts and expense accounts are transferred to the income summary account. The income summary account’s net balance would be transferred to the company’s retained earnings.

Prepare the closing entry for the income summary account as shown below.

Pass the closing entry for transferring the expenses accounts.

Prepare the closing entry for the income summary account as shown below.

Working note:

Computation of income to be transferred to income summary:

$\begin{array}{c}\\{\rm{Income transferred to income summary}} = {\rm{Credit balance}}\,{\rm{of}}\,{\rm{income summary account}}\\\\ - {\rm{Debit balance of income summary account}}\\\\ = \$ 410,000 - 336,700\\\\ = \$ 73,300\\\end{array}$

Prepare the closing entry for the dividend account as shown below.

Ans: