Question

The following is information from Crystal Company's adjusted trial balance at December 31, 2021: Debit Credit Cash $76,000 Notes receivable 101,000 Merchandise inventory 70,000 Equipment 450,600 Accumulated depreciation-equipment $135,180 Unearned revenue 8,600 Notes payable 168,880 L. Crystal, capital 235,000 L. Crystal, drawings 144,000 Interest revenue 11,000 25,000 Rent revenue Sales 1,980,000 Advertising expense 57,000 Cost of goods sold 850,000 Depreciation expense 45,060 Freight out 25,000

Answer 1

All accounts can be segregated into two different groups :

1. Permanent accounts - These are balance sheet accounts including assets,liabilities and equity accounts.The balances of these accounts roll over to the next period.Hence,no closing entries are needed to be done.

2. Temporary accounts - These include revenue,expenses, dividends or withdrawals accounts.The balances of these accounts do not roll over to the next period.The closing entries reduces the balances of these accounts to zero.We use income summary account to store the closing entries until we get to close the income summary into retained earnings.

The closing entries for the above mentioned Trial balance would be as under:

Date	Account Title and Explanation	Debit	Credit
12/31/2021	Sales	$1,980,000
	Interest revenue	$11,000
	Rent revenue	$25,000
	Income summary		$2,016,000
		$2,016,000	$2,016,000
	(to close income statement account with credit entries)
Date	Account Title and Explanation	Debit	Credit
12/31/2021	Income summary	$1,677,000
	Advertising expense		$57,000
	Cost of goods sold		$850,000
	Freight out		$25,000
	Insurance expense		$16,000
	Interest expense		$10,100
	Salaries expense		$650,000
	Sales discounts		$9,900
	Sales returns and allowances		$59,000
		$1,677,000	$1,677,000
	(to close income statement account with debit entries)

The income summary account is closed by transferring the balance of the account to the Retained earnings account

Date	Account Title and Explanation	Debit	Credit
12/31/2021	Revenue		$2,016,000
	Expense	$1,677,000
	Retained earnings	$339,000
		$2,016,000	$2,016,000
	(to close income summary account by transferring the excess of income over expenses to Retained Earnings)