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Chapter 5 The Accounting Cycle: Reporting Financial Rosults Refer to the adjusted trial balance of Tutors for Rent, Inc., illustrated in Exercise 5.2 to respond to the following items: a. Prepare all necessary closing entries at December 31 , 2011. b. Prepare an after-closing trial balance dated December 31,2011. c. Compare the Retained Earnings balance reported in the after-closing trial balance prepared in part b to the balance reported in the adjusted trial balance. Explain why the two balances are different. (Include in your explanation why the balance reported in the after-closing trial bal- ance has increased or decreased subsequent to the closing process.)
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a. Closing entries are made at the end of an accounting period to transfer the balances of temporary accounts (revenue, expense, and dividend accounts) to permanent accounts (asset, liability, and equity accounts). The following closing entries would be made for Tutors for Rent, Inc. at December 31, 2011:1. Close revenue accounts:Debit: Rent Revenue
10,0002. Close expense accounts:Debit: Income Summary
6,0003. Close income summary account to retained earnings:Debit: Income Summary
4,0004. Close dividends account to retained earnings:Debit: Retained Earnings
1,000b. An after-closing trial balance is prepared to ensure that all temporary accounts have been closed and that the ledger is ready for the next accounting period. The after-closing trial balance for Tutors for Rent, Inc. at December 31, 2011, would include only permanent accounts:Tutors for Rent, Inc.After-closing Trial BalanceDecember 31, 2011Assets:Cash
10,000Total Assets
6,000Total Liabilities
4,000Total Equity
20,000c. The Retained Earnings balance reported in the after-closing trial balance (
3,000) because of the closing entries made. The closing entries transferred the net income (Revenue - Expenses =
6,000 =
1,000) to the Retained Earnings account. This increased the Retained Earnings balance by
3,000 = $1,000.