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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

Mason Advertising was founded in January 2013. Presented below are adjusted and unadjusted trial balances as of December 31, 2017.


MASON ADVERTISINGTRIAL BALANCEDECEMBER 31, 2017


UnadjustedAdjusted

Dr.

Cr.

Dr.

Cr.

Cash

\( 11,000

\) 11,000

Accounts Receivable

20,000

23,500

Supplies

8,400

3,000

Prepaid Insurance

3,350

2,500

Equipment

60,000

60,000

Accumulated Depreciation鈥擡quipment

\( 28,000

\) 33,000

Accounts Payable

5,000

5,000

Interest Payable

鈥�0鈥�

150

Notes Payable

5,000

5,000

Unearned Service Revenue

7,000

5,600

Salaries and Wages Payable

鈥�0鈥�

1,300

Common Stock

10,000

10,000

Retained Earnings

3,500

3,500

Service Revenue

58,600

63,500

Salaries and Wages Expense

10,000

11,300

Insurance Expense

850

Interest Expense

350

500

Depreciation Expense

5,000

Supplies Expense

5,400

Rent Expense

4,000

4,000

\(117,100

\)117,100

\(127,050

\)127,050

Instructions

  1. Journalize the annual adjusting entries that were made. (Omit explanations.)
  2. 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.
  3. Answer the following questions.
    1. If the note has been outstanding 3 months, what is the annual interest rate on that note?
    2. If the company paid $12,500 in salaries and wages in 2017, what was the balance in Salaries and Wages Payable on December 31, 2016?

(LO2,3) Dresser Company鈥檚 weekly payroll, paid on Fridays, totals \(8,000. Employees work 5-days week. Prepare Dresser鈥檚 adjusting entry on Wednesday, December 31, and the journal entry to record the \)8,000 cash payment on Friday, January 2.

E3-8 (L03) EXCEL (Adjusting Entries) Andy Roddick is the new owner of Ace Computer Services. At the end of August2017, his first month of ownership, Roddick is trying to prepare monthly financial statements. Below is some information relatedto unrecorded expenses that the business incurred during August.1. At August 31, Roddick owed his employees \(1,900 in wages that will be paid on September 1.2. At the end of the month, he had not yet received the month鈥檚 utility bill. Based on past experience, he estimated the billwould be approximately \)600.3. On August 1, Roddick borrowed \(30,000 from a local bank on a 15-year mortgage. The annual interest rate is 8%.4. A telephone bill in the amount of \)117 covering August charges is unpaid at August 31.InstructionsPrepare the adjusting journal entries as of August 31, 2017, suggested by the information above.

E3-2 (L02) (Corrected Trial Balance) The following trial balance of Wanda Landowska Company does not balance. Yourreview of the ledger reveals the following. (a) Each account had a normal balance. (b) The debit footings in Prepaid Insurance,Accounts Payable, and Property Tax Expense were each understated \(100. (c) A transposition error was made in AccountsReceivable and Service Revenue; the correct balances for Accounts Receivable and Service Revenue are \)2,750 and \(6,690,respectively. (d) A debit posting to Advertising Expense of \)300 was omitted. (e) A \(1,500 cash drawing by the owner was debited to Owner鈥檚 Capital and credited to Cash.

WANDA LANDOWSKA COMPANYTRIAL BALANCEAPRIL 30, 2017

Debit (\)) Credit (\()Cash \) 4,800Accounts Receivable 2,570Prepaid Insurance 700Equipment \( 8,000Accounts Payable 4,500Property Taxes Payable 560Owner鈥檚 Capital 11,200Service Revenue 6,960Salaries and Wages Expense 4,200Advertising Expense 1,100Property Tax Expense 800

Total \)20,890 $24,500

Prepare a correct trial balance.

Is it necessary that a trial balance be taken periodically? What purpose does it serve?
See all solutions

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