Book 2 - Chapter 16

Multiple Choice
1.	d
2.	a
3.	b
4.	d Because drawing is closed directly into the capital account, not into income summary.
5.	c
6.	b This a permanent account—specifically, a contra asset.
7.	a
8.	a
9.	a
10.	c
11.	d

Discussion Questions and Brief Exercises

Closing entries accomplish three specific objectives:

•	Transfer net income or net loss of the current period into the capital account
•	Transfer the current period balance of the drawing account into the capital account
•	Create zero balances in the temporary accounts at the end of the current period

Closing entries are prepared at the end of an accounting period. They are the very last entries of
an accounting period. This is to be sure that all other transactions and adjustments have been
completed so that the accounts are up to date and correct as of the end of the period.

The six types of owner's equity accounts are:

•	Capital
•	Revenue
•	Expense
•	Drawing
•	Gains
•	Losses

In this learning goal we studied the first four accounts. However, gains have the same effect on
the capital account as revenues and are closed in the same manner. Expenses have the same
effect on the capital account as expenses and are closed in the same manner.

A temporary account is an owner's equity account and is closed at the end of an accounting
period. The temporary accounts that we studied are revenue, expense, and drawing accounts. (The
other two temporary accounts are gain and loss accounts.) These accounts are sometimes referred
to as income statement accounts. Permanent accounts are accounts that are never closed: asset,
liability, and owner's capital accounts, which are sometimes referred to as balance sheet accounts.

Adjusting entries apply the revenue and recognition and matching principles to ensure that all
revenues and expenses are properly recorded in each accounting period. Adjusting entries are
also used for valuation purposes to change recorded account values under certain
circumstances. Closing entries close temporary accounts into the owner�s capital account.

The format of the correct closing entry is:

	Income Summary		55,400
		XXX, Capital		55,400

This represents net income because the income summary account has a credit balance.

The post-closing trial balance verifies that the ledger remains in balance (total debits equal total
credits) after the closing entries have been posted.

Learning Goal 16

SOLUTIONS

Learning Goal 16: Prepare Closing Entries

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