On December 31, 2016, Ditka Inc. had Retained Earnings of $278,800 before its cl
ID: 2478724 • Letter: O
Question
On December 31, 2016, Ditka Inc. had Retained Earnings of $278,800 before its closing entries were prepared and posted. During 2016, the company had service revenue of $179,100 and interest revenue of $86,800. The company used supplies in the amount of $93,400, advertising expenses were $17,500, salaries and wages totaled $19,950, and income tax expense was calculated as $15,900. During the year, the company declared and paid dividends of $7,100. a. Prepare the closing entries dated December 31, 2016
Explanation / Answer
Rules for closing the accounts at year end
1) Debit all the income accounts and credit the income summary account with the total of all income amounts.
2) Credit all expense accounts and debit the income summary account with the total of all expense accounts.
3) Now ,calculate the net balance of income summary account to determine profit or loss .
If there is a profit i.e. Credit balance of income summary account exceeds the debit balance ,then last entry is to debit the income summary account and credit the retailed earnings account which will be taken to the balance sheet under stock holder equity section.
If there is a loss i.e. the debit balance of income summary exceeds the credit balance ,then there will opposite entry to adjust loss from the retained earnings account. Debit the retained earnings account and credit the income summary account.
Notes
1. Service revenue account is debited and its balance it credited to income summary account. Similarly, interest revenue is an income and hence it will be debited to transfer its balance to the income summary account and the income summary account will be credited .Likewise ,if there is any other income, that will be debited to transfer the balance to income summary account and income summary account will be credited with the total amount of all such income accounts.
2. Each expense account is credited and the income summary is debited for the sum of the balances of expense accounts. This will reduce the balance in income summary account.
3. Now ,we will calculate the difference between the credit and debit balance of income summary account and transfer the net balance to retained earnings A/C.
Income summary account is debited and retained earnings account is credited for the an amount equal to the excess of service revenue over total expenses i.e. the net balance in income summary account after posting the first two closing entries. In this case $265900 $146750 = $119150. Please note that, if the balance in income summary account is negative ,then there will be an opposite entry wherein the income summary account will be credited and retained earnings account will be debited.
4. The last closing entry transfers the dividend or withdrawal account balance to the retained earnings account.
Dividends are paid out of retained earnings and hence it will reduce the amount in retained earnings account.
Calculation of ending balance in retained earnings account to be taken to balance sheet
Retained earnings before closing accounts 278,800
Add: Transfer from income summary account 119,150
Less: Dividends 7,100
Closing balance of retained earnings to be taken to balance sheet 390,850
Note
Date
Account
Debit
Credit
1
Dec-31
Service Revenue A/C Dr
179100
Interest Revenue A/C Dr
86800
To Income summary A/C
265900
2
Dec-31
Income Summary A/C Dr
146750
To Salaries and Wages Expense
19950
To Supplies Expense
93400
To Advertising expenses
17500
To Income tax Expense
15900
3
Dec-31
Income summary A/C Dr
119150
To Retained earnings A/C
119150
4
Dec-31
Retained earnings A/C Dr
7100
To dividend
7100
5
Dec-31
Retained earnings A/C Dr
390850
To Share capital A/C
390850
Note
Date
Account
Debit
Credit
1
Dec-31
Service Revenue A/C Dr
179100
Interest Revenue A/C Dr
86800
To Income summary A/C
265900
2
Dec-31
Income Summary A/C Dr
146750
To Salaries and Wages Expense
19950
To Supplies Expense
93400
To Advertising expenses
17500
To Income tax Expense
15900
3
Dec-31
Income summary A/C Dr
119150
To Retained earnings A/C
119150
4
Dec-31
Retained earnings A/C Dr
7100
To dividend
7100
5
Dec-31
Retained earnings A/C Dr
390850
To Share capital A/C
390850
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