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Chapter 3: Question 12Q (page 127)

What are closing entries and why are they necessary?

Short Answer

Expert verified

Closing entries are the journal entries prepared at the end of a financial period to carry forward balances from a temporary account to a permanent one. The objective of the closing entry is to initialize the temporary account balances to zero, all set to commence another financial period.

Step by step solution

01

Meaning of Closing Entry

Closing entries are prepared to shift the nominal account balances to capital, that is, retained earnings, after taking into account adjusting entries and preparing the financial statements.

02

Importance of closing entries

The motive for preparing closing entries is as follows:

  • Closing entries are essential because it helps the firm to evaluate the piled-up income of an accounting period and check the accuracy of the data figures present on the adjusted trial balance.
  • It also helps us to ascertain the net income of the present accounting period.

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Most popular questions from this chapter

The following are the trial balance and the other information related to Yorkis Perez, a consulting engineer.

YORKIS PEREZ, CONSULTING ENGINEER .
TRIAL BALANCE
DECEMBER 31, 2017

Debit

Credit

Cash

\( 29,500

Accounts Receivable

49,600

Allowance for Doubtful Accounts

\) 750

Supplies

1,960

Prepaid Insurance

1,100

Equipment

25,000

Accumulated Depreciation鈥擡quipment

6,250

Notes Payable

7,200

Owner鈥檚 Capital

35,010

Service Revenue

100,000

Rent Expense

9,750

Salaries and Wages Expense

30,500

Utilities Expenses

1,080

Office Expense

720

\(149,210

\)149,210

  1. Fees received in advance from clients \(6,000, which were recorded as revenue.
  2. Services performed for clients that were not recorded by December 31, \)4,900.
  3. Bad debt expense for the year is \(1,430.
  4. Insurance expired during the year \)480.
  5. Equipment is being depreciated at 10% per year.
  6. Yorkis Perez gave the bank a 90-day, 10% note for \(7,200 on December 1, 2017.
  7. Rent of the building is \)750 per month. The rent for 2017 has been paid, as has that for January 2018, and recorded as Rent Expense.
  8. Office salaries and wages earned but unpaid December 31, 2017, \(2,510.

Instructions

  1. From the trial balance and other information given, prepare annual adjusting entries as of December 31, 2017. (Omit explanations.)
  2. Prepare an income statement for 2017, a statement of owner鈥檚 equity, and a classified balance sheet. Yorkis Perez withdrew \)17,000 cash for personal use during the year.

Give an example of a transaction that result in:

  1. A decrease in asset and a decrease in a liability.
  2. A decrease in one asset and an increase in another asset.
  3. A decrease in one liability and an increase in another liability.

What differences are there between the trial balance before closing and the trial balance after closing with respect to the following accounts?

a) Accounts payable

b) Expense accounts

c) Revenue accounts

d) Retained Earnings account

e) Cash

On January 1, 2017, Norma Smith and Grant Wood formed a computer sales and service company in Soapsville, Arkansas, by investing \(90,000 cash. The new company, Arkansas Sales and Service, has the following transactions during January.

1. Pays \)6,000 in advance for 3 months鈥� rent of office, showroom, and repair space.

2. Purchases 40 personal computers at a cost of \(1,500 each, 6 graphics computers at a cost of \)2,500 each, and 25 printers at a cost of \(300 each, paying cash upon delivery

3. Sales, repair, and office employees earn \)12,600 in salaries and wages during January, of which \(3,000 was still payable at the end of January.

4. Sells 30 personal computers at \)2,550 each, 4 graphics computers for \(3,600 each, and 15 printers for \)500 each; \(75,000 is received in cash in January, and \)23,400 is sold on a deferred payment basis.

5. Other operating expenses of \(8,400 are incurred and paid for during January; \)2,000 of incurred expenses are payable at January 31.

Instructions

  1. Using the transaction data above, prepare (1) a cash-basis income statement and (2) an accrual-basis income statement for the month of January.
  2. Using the transaction data above, prepare (1) a cash-basis balance sheet and (2) an accrual-basis balance sheet as of January 31, 2017.
  3. Identify the items in the cash-basis financial statements that make cash-basis accounting inconsistent with the theory underlying the elements of financial statements.

Santo Design was founded by Thomas Grant in January 2011. Presented below is the adjusted trial balance as of December 31, 2017.

SANTO DESIGN

ADJUSTED TRIAL BALANCE

DECEMBER 31, 2017


Dr.

Cr.

Cash

\( 11,350

Accounts Receivable

21,500

Supplies

5,000

Prepaid Insurance

2,500

Equipment

60,000

Accumulated Depreciation鈥擡quipment

\) 35,000

Accounts Payable

5,000

Interest Payable

150

Notes Payable

5,000

Unearned Service Revenue

5,600

Salaries and Wages Payable

1,300

Common Stock

10,000

Retained Earnings

3,500

Service Revenue

61,500

Salaries and Wages Expense

11,300

Insurance Expense

850

Interest Expense

150

Depreciation Expense

7,000

Supplies Expense

3,400

Rent Expense

4,000

\(127,050

\)127,050

Instructions

a. Prepare an income statement and a statement of retained earnings for the year ending December 31, 2017, and an unclassified balance sheet at December 31.

b. Answer the following questions.

1.If the note has been outstanding for 6 months, what is the annual interest rate on that note?

2.If the company paid $17,500 in salaries in 2017, what was the balance in Salaries and Wages Payable on December 31, 2016?
See all solutions

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