Josh’s Pool Service Had The Following Selected Accounts And Normal Balances Listed On Its December 31 Adjusting Trial Balance: Journalize The Closing Entries For Josh’s Pool Service
Understanding the Importance of Closing Entries
As a business owner, it is essential to understand the importance of closing entries in accounting. Closing entries are journal entries that are made at the end of an accounting period to transfer the balances of temporary accounts to permanent accounts. This process is crucial in maintaining the accuracy and integrity of a company's financial records.
Selected Accounts and Normal Balances
The following selected accounts and normal balances were listed on Josh's pool service's December 31 adjusting trial balance:
| Account | Debit Balance | Credit Balance |
|---|---|---|
| Cash | $10,000 | |
| Accounts Receivable | $5,000 | |
| Supplies | $2,000 | |
| Prepaid Insurance | $1,500 | |
| Equipment | $20,000 | |
| Accumulated Depreciation | $5,000 | |
| Salaries Expense | $8,000 | |
| Rent Expense | $3,000 | |
| Utilities Expense | $2,000 | |
| Insurance Expense | $1,000 | |
| Income Tax Expense | $1,500 | |
| Service Revenue | $30,000 | |
| Cost of Goods Sold | $15,000 |
Journalizing Closing Entries
To close the temporary accounts, we need to make journal entries that transfer the balances of these accounts to the permanent accounts. The following are the journal entries for Josh's pool service:
Closing Salaries Expense
- Debit: Salaries Expense ($8,000)
- Credit: Salaries Payable ($8,000)
| Date | Account | Debit | Credit |
|---|---|---|---|
| Dec 31 | Salaries Expense | $8,000 | |
| Dec 31 | Salaries Payable | $8,000 |
Closing Rent Expense
- Debit: Rent Expense ($3,000)
- Credit: Rent Payable ($3,000)
| Date | Account | Debit | Credit |
|---|---|---|---|
| Dec 31 | Rent Expense | $3,000 | |
| Dec 31 | Rent Payable | $3,000 |
Closing Utilities Expense
- Debit: Utilities Expense ($2,000)
- Credit: Utilities Payable ($2,000)
| Date | Account | Debit | Credit |
|---|---|---|---|
| Dec 31 | Utilities Expense | $2,000 | |
| Dec 31 | Utilities Payable | $2,000 |
Closing Insurance Expense
- Debit: Insurance Expense ($1,000)
- Credit: Insurance Payable ($1,000)
| Date | Account | Debit | Credit |
|---|---|---|---|
| Dec 31 | Insurance Expense | $1,000 | |
| Dec 31 | Insurance Payable | $1,000 |
Closing Income Tax Expense
- Debit: Income Tax Expense ($1,500)
- Credit: Income Tax Payable ($1,500)
| Date | Account | Debit | Credit |
|---|---|---|---|
| Dec 31 | Income Tax Expense | $1,500 | |
| Dec 31 | Income Tax Payable | $1,500 |
Closing Cost of Goods Sold
- Debit: Cost of Goods Sold ($15,000)
- Credit: Inventory ($15,000)
| Date | Account | Debit | Credit |
|---|---|---|---|
| Dec 31 | Cost of Goods Sold | $15,000 | |
| Dec 31 | Inventory | $15,000 |
Closing Service Revenue
- Debit: Service Revenue ($30,000)
- Credit: Retained Earnings ($30,000)
| Date | Account | Debit | Credit |
|---|---|---|---|
| Dec 31 | Service Revenue | $30,000 | |
| Dec 31 | Retained Earnings | $30,000 |
Closing Salaries Payable, Rent Payable, Utilities Payable, Insurance Payable, and Income Tax Payable
- Debit: Salaries Payable ($8,000), Rent Payable ($3,000), Utilities Payable ($2,000), Insurance Payable ($1,000), and Income Tax Payable ($1,500)
- Credit: Cash ($15,500)
| Date | Account | Debit | Credit |
|---|---|---|---|
| Dec 31 | Salaries Payable | $8,000 | |
| Dec 31 | Rent Payable | $3,000 | |
| Dec 31 | Utilities Payable | $2,000 | |
| Dec 31 | Insurance Payable | $1,000 | |
| Dec 31 | Income Tax Payable | $1,500 | |
| Dec 31 | Cash | $15,500 |
Closing Entries Summary
The following is a summary of the closing entries for Josh's pool service:
- Debit: Salaries Expense ($8,000), Rent Expense ($3,000), Utilities Expense ($2,000), Insurance Expense ($1,000), Income Tax Expense ($1,500), and Cost of Goods Sold ($15,000)
- Credit: Salaries Payable ($8,000), Rent Payable ($3,000), Utilities Payable ($2,000), Insurance Payable ($1,000), Income Tax Payable ($1,500), Inventory ($15,000), and Retained Earnings ($30,000)
- Debit: Salaries Payable ($8,000), Rent Payable ($3,000), Utilities Payable ($2,000), Insurance Payable ($1,000), and Income Tax Payable ($1,500)
- Credit: Cash ($15,500)
Conclusion
Understanding Closing Entries: Frequently Asked Questions
As a business owner, it's essential to understand the importance of closing entries in accounting. However, you may have questions about the process. Here are some frequently asked questions about closing entries:
Q: What is the purpose of closing entries?
A: Closing entries are journal entries that are made at the end of an accounting period to transfer the balances of temporary accounts to permanent accounts. This process helps to ensure that the financial records are accurate and up-to-date.
Q: What are temporary accounts?
A: Temporary accounts are accounts that are closed at the end of an accounting period. These accounts include:
- Revenue accounts (e.g., Service Revenue)
- Expense accounts (e.g., Salaries Expense)
- Gain accounts (e.g., Gain on Sale of Assets)
- Loss accounts (e.g., Loss on Sale of Assets)
Q: What are permanent accounts?
A: Permanent accounts are accounts that are not closed at the end of an accounting period. These accounts include:
- Asset accounts (e.g., Cash, Accounts Receivable)
- Liability accounts (e.g., Accounts Payable, Salaries Payable)
- Equity accounts (e.g., Retained Earnings)
Q: Why do we need to close temporary accounts?
A: We need to close temporary accounts to ensure that the financial records are accurate and up-to-date. Temporary accounts are used to record transactions during the accounting period, but they are not needed once the period is closed. Closing these accounts helps to prevent errors and ensures that the financial statements are accurate.
Q: How do we close temporary accounts?
A: To close temporary accounts, we make journal entries that transfer the balances of these accounts to permanent accounts. The journal entries are made at the end of the accounting period, and they are typically dated the last day of the period.
Q: What are the steps involved in closing entries?
A: The steps involved in closing entries are:
- Identify the temporary accounts that need to be closed.
- Determine the balances of these accounts.
- Make journal entries to transfer the balances of these accounts to permanent accounts.
- Post the journal entries to the general ledger.
- Close the temporary accounts by debiting them and crediting the permanent accounts.
Q: What are the benefits of closing entries?
A: The benefits of closing entries include:
- Ensuring that the financial records are accurate and up-to-date.
- Preventing errors and ensuring that the financial statements are accurate.
- Providing a clear picture of the company's financial performance.
- Helping to identify areas for improvement.
Q: What are some common mistakes to avoid when closing entries?
A: Some common mistakes to avoid when closing entries include:
- Failing to identify temporary accounts that need to be closed.
- Failing to determine the balances of these accounts.
- Making incorrect journal entries.
- Failing to post the journal entries to the general ledger.
- Failing to close the temporary accounts.
Conclusion
In conclusion, closing entries are an essential part of the accounting process. By understanding the purpose and steps involved in closing entries, businesses can ensure that their financial records are accurate and up-to-date. By avoiding common mistakes and following the steps outlined in this article, businesses can ensure that their closing entries are properly recorded and that their financial statements are accurate and reliable.
Additional Resources
For more information on closing entries, please refer to the following resources:
- Accounting textbooks and online resources
- Financial statements and accounting software
- Professional accounting associations and organizations
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