Page 261 - Accounting Principles (A Business Perspective)

This book is licensed under a Creative Commons Attribution 3.0 License

Balance sheet The balance sheet, Exhibit 43, contains the assets, liabilities, and stockholders' equity items
taken from the work sheet. Note the USD 8,000 ending inventory is a current asset. The Retained Earnings account
balance comes from the statement of retained earnings.

Recall from Chapter 4 that the closing process normally takes place after the accountant has prepared the
financial statements for the period. The closing process closes revenue and expense accounts by transferring their
balances to a clearing account called Income Summary and then to Retained Earnings. The closing process reduces
the revenue and expense account balances to zero so that information for each accounting period may be
accumulated separately.
Lyons's accountant would prepare closing entries directly from the work sheet in Exhibit 40 using the same
procedure presented in Chapter 4. The closing entries for Lyons Company follow.

The first journal entry debits all items appearing in the Income Statement credit column of the work sheet and
credits Income Summary for the total of the column, USD 22,782.
2010
Dec. 31 Merchandise Inventory (ending) 8,000
Sales 14,600
Purchase Discounts 82
• 1 entry Purchase Returns and Allowances 100
st
Income Summary 22,782
To close accounts with a credit balance in the Income
Statement columns and to establish ending merchandise
inventory.
The second entry credits all items appearing in the Income Statement debit column and debits Income
Summary for the total of that column, USD 16,939.
2010
Dec. 31 Income Summary 16,939 7,000
Merchandise Inventory (beginning) 44
Sales Discounts 20
Sales Returns and Allowance
• 2 entry Purchases 6,000
nd
Transportation-In 75
Miscellaneous Selling Expenses 2,650
Miscellaneous Administrative Expenses 1,150
To close accounts with a debit balance in the Income
Statement columns.
The third entry closes the credit balance in the Income Summary account of USD 5,843 to the Retained
Earnings account.
2010 5,843
Dec. 31 Income Summary 5,843
Retained Earnings
To close the Income Summary account to the Retained
Earnings account.
The fourth entry closes the Dividends account balance of $2,000 to the Retained Earnings account by debiting
Retained Earnings and crediting Dividends.
2010 2,000
Dec. 31 Retained Earnings 2,000
Dividends
To close the Dividends account to the Retained Earnings
account.
Note how the first three closing entries tie into the totals in the Income Statement columns of the work sheet in
Exhibit 40. In the first closing journal entry, the credit to the Income Summary account is equal to the total of the
Income Statement credit column. In the second entry, the debit to the Income Summary account is equal to the

Accounting Principles: A Business Perspective 262 A Global Text