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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

EXCEL (Adjusting Entries) The ledger of Duggan Rental Agency on March 31 of the current year includes the following selected accounts before adjusting entries have been prepared.

Debit Credit

Prepaid Insurance \(3,600

Supplies \)2,800

Equipment \(25,000

Accumulated Depreciation- Equipment \)8,400

Notes Payable \(20,000

Unearned Rent Revenue \)9,300

Rent Revenue \(60,000

Interest Expenses -0-

Salaries and Wages Expenses \)14,000

An analysis of accounts shows the following.

  1. The equipment depreciates \(250 per month.

  2. One-third of the unearned rent was recognized as revenue during the quarter.

  3. Interest of \)500 is accrued on the notes payable.

  4. Supplies on hand total \(850

  5. Insurance expires at the rate of \)300 per month.

Instructions

Prepare the adjusting entries at March 31, assuming that adjusting entries are made quarterly. Additional accounts are Depreciation Expenses, Insurance Expenses, Interest Payable, and Supplies expenses. (Omit Explanations)

The following trial balance of Watteau Co. does not balance:

WATTEAU CO.

TRIAL BALANCE

JUNE 30, 2017

Debit \(

Credit \)

Cash

\(2,870

Accounts receivable

\)3,231

Supplies

800

Equipment

3,800

Account payable

2,666

Unearned service revenue

1,200

Common stock

6,000

Retained earnings

3,000

Service revenue

2,380

Salaries and wages expenses

3,400

Office expenses

940

\(13,371

\)16,916

Each of the listed accounts should have a normal balance per the general ledger. An examination of the ledger and journal reveals the following errors.

  1. Cash received from the customer on account was debited for \(570, and accounts receivable was credited for the same amount. The actual collection was for \)750.
  2. The purchase of a computer printer on account for \(500 was recorded as a debit to Supplies for \)500 and a credit to Accounts Payable for \(500.
  3. Services were performed on account for a client for \)890. Accounts receivable was debited for \(890 and service revenue was credited for \)89.
  4. A payment of \(65 for telephone charges was recorded as a debit to Office Expense for \)65 and a debit to Cash for \(65.
  5. When the unearned service revenue account was reviewed, it was found that service revenue amounting to \)325 was performed prior to June 30 (related to unearned service revenue).
  6. A debit posting to salaries and wages expenses of \(670 was omitted.
  7. A payment on account for \)206 was credited to cash for \(206 and credit to account payable for \)260.
  8. A dividend of \(575 was debited to salaries and wages expenses for \)575 and credit to cash for $575.

Instruction

Prepare a correct trial balance. (Note: It may be necessary to add one or more accounts to the trial balance.)

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 \(1,900 in wages that will be paid on September 1.2. At the end of the month, he had not yet received the month’s utility bill. Based on past experience, he estimated the billwould be approximately \)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.

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—Equipment

6,250

Notes Payable

7,200

Owner’s 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’s equity, and a classified balance sheet. Yorkis Perez withdrew \)17,000 cash for personal use during the year.

BE3-5 (L02,3) Assume that on February 1, Procter & Gamble (P&G) paid $720,000 in advance for 2 years’ insurance coverage. Prepare P&G’s February 1 journal entry and the annual adjusting entry on June 30.
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