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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 trial balance of Bellemy Fashion Center contained the following accounts at November 30, the end of the company’s fiscal year.

BELLEMY FASHION CENTER

TRIAL BALANCE

NOVEMBER 30, 2017

Debit

Credit

Cash

\( 28,700

Accounts Receivable

33,700

Inventory

45,000

Supplies

5,500

Equipment

133,000

Accumulated Depreciation—Equipment

\) 24,000

Notes Payable

51,000

Accounts Payable

48,500

Common Stock

90,000

Retained Earnings

8,000

Sales Revenue

757,200

Sales Returns and Allowances

4,200

Cost of Goods Sold

495,400

Salaries and Wages Expense

140,000

Advertising Expense

26,400

Utilities Expenses

14,000

Maintenance and Repairs Expense

12,100

Delivery Expense

16,700

Rent Expense

24,000

\(978,700

\)978,700

Adjustment data:

1. Supplies on hand total \(1,500.

2. Depreciation is \)15,000 on the equipment.

3. Interest of \(11,000 is accrued on notes payable at November 30.

Other data:

1. Salaries expense is 70% selling and 30% administrative.

2. Rent expense and utilities expenses are 80% selling and 20% administrative.

3. Notes payable worth \)30,000 are due for payment next year.

4. Maintenance and repairs expense is 100% administrative.

Instructions

(a) Journalize the adjusting entries.

(b) Prepare an adjusted trial balance.

(c) Prepare a multiple-step income statement and retained earnings statement for the year and a classified balance sheet as of November 30, 2017.

(d) Journalize the closing entries.

(e) Prepare a post-closing trial balance.

Jurassic Park Co. prepares monthly financial statements from a worksheet. Selected portions of the January worksheet showed the following data.

JURASSIC PARK CO.

Worksheet (PARTIAL)

For The Month Ended Jan. 31, 2017



Trial Balance
Adjustment
Adjusted
trial balance

Account Titles

Dr.

Cr.

Dr.

Cr.

Dr.

Cr.

Supplies

3,256

a) 1,500

1,756

Accumulated Depreciation—Equipment

6,682

(b) 257

6,939

Interest Payable

(c) 50

150

Supplies Expense

(a) 1,500

1,500

Depreciation Expense

(b) 257

257

Interest Expense

(c) 50

50

During February, no events occurred that affected these accounts. But at the end of February, the following information was available.

  1. Supplies on hand \(715
  2. Monthly depreciation \)257
  3. Accrued interest $ 50

Instructions

Reproduce the data that would appear in the February worksheet, and indicate the amounts that would be shown in the February income statement.

Which statement is correct regarding IFRS?

(a) IFRS reverses the rules of debits and credits, that is, debits are on the right and credits are on the left.

(b) IFRS uses the same process for recording transactions as GAAP.

(c) The chart of accounts under IFRS is different because revenues follow assets.

(d) None of the above statements are correct.

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

(L09) (Worksheet) Presented below are the selected accounts for Alvarez Company as reported in the worksheet at the end of May 2017.

ALVAREZ CO.

Worksheet

For The Month Ended May 31, 2017

Adjusted

Trial Balance

Income

Statement

Balance

Sheet

Accounts Titles

Dr.

Cr.

Dr.

Cr.

Dr.

Cr.

Cash

9,000

Inventory

80,000

Sales Revenue

450,000

Sales returns and allowances

10,000

Sales Discounts

5,000

Cost of Goods Sold

250,000

Instructions:

Complete the worksheet by extending the amounts reported in the adjusted trial balance to the appropriate columns in the worksheet. Do not total individual columns.
See all solutions

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