E13 Selected account balances of the Lakeside Grocery Store for the year ended December 31, 20xx, follow. Beginning merchandise inventory was $ 26,000, and ending merchandise inventory is $ 22,000. Prepare closing entries, assuming that the owner of Lakeside Grocery, John Grover, withdrew $ 34, 000 for personal expenses during the year.
Account Name Debit Credit
Sales $ 297,000
Sales Returns & Allowances $ 11,000
Sales Discounts 4,200
Purchases 114,800
Purchases returns and allowances 1,800
Purchases Discounts 2,200
Freight in 5,600
Selling Expenses 48,500
General & Administrative Expenses 37,200
To prepare the closing entries for Lakeside Grocery Store, we need to close the revenue and expense accounts to the income summary account, and then transfer the balance of the income summary account to the owner's equity account. Here are the step-by-step instructions:
Step 1: Close the revenue accounts
Debit: Sales Returns & Allowances $11,000
Debit: Sales Discounts $4,200
Credit: Sales $297,000
Step 2: Close the expense accounts
Debit: Income Summary $82,900 ($48,500 + $37,200)
Credit: Selling Expenses $48,500
Credit: General & Administrative Expenses $37,200
Step 3: Close the income summary account
Debit: Income Summary $82,900
Credit: Owner's Equity $82,900
Step 4: Adjust for the owner's withdrawal
Debit: Owner's Equity $34,000
Credit: Owner's Withdrawals $34,000
And that's it, you have prepared the closing entries for Lakeside Grocery Store for the given account balances.
To prepare the closing entries, we need to transfer the account balances to the appropriate income statement and balance sheet accounts, and then close the income statement accounts to the owner's capital account.
1. Start by transferring the sales, sales returns & allowances, and sales discounts to the Income Summary account.
- Debit the Sales Returns & Allowances with $11,000.
- Debit the Sales Discounts with $4,200.
- Credit the Sales account with $297,000.
- Credit the Income Summary account with $282,800.
2. Transfer the purchases, purchase returns & allowances, purchases discounts, and freight in to the Purchase account.
- Debit the Purchases Returns & Allowances with $1,800.
- Debit the Purchases Discounts with $2,200.
- Debit the Freight In account with $5,600.
- Credit the Purchases account with $114,800.
- Credit the Purchase Returns & Allowances with $1,800.
- Credit the Purchase Discounts with $2,200.
- Credit the Freight In account with $5,600.
3. Transfer the selling expenses and general & administrative expenses to their respective expense accounts.
- Debit the Selling Expenses account with $48,500.
- Debit the General & Administrative Expenses account with $37,200.
4. Calculate the Cost of Goods Sold (COGS) by using the beginning and ending merchandise inventory values.
COGS = Beginning Merchandise Inventory - Ending Merchandise Inventory
= $26,000 - $22,000
= $4,000
5. Transfer the COGS to the Income Summary account.
- Debit the Income Summary account with $4,000.
- Credit the COGS account with $4,000.
6. Calculate the Gross Profit by subtracting the COGS from the Sales account.
Gross Profit = Sales - COGS
= $297,000 - $4,000
= $293,000
7. Transfer the Gross Profit to the Income Summary account.
- Credit the Income Summary account with $293,000.
- Debit the Gross Profit account with $293,000.
8. Calculate the Net Income by subtracting the selling expenses and general & administrative expenses from the Income Summary account.
Net Income = Income Summary - Selling Expenses - General & Administrative Expenses
= $282,800 - $48,500 - $37,200
= $197,100
9. Transfer the Net Income to the owner's capital account.
- Credit the Income Summary account with $197,100.
- Debit the Owner's Capital account with $197,100.
10. Lastly, determine the amount of owner's withdrawal for personal expenses during the year and transfer it to the owner's capital account.
- Debit the Owner's Capital account with $34,000.
After completing the above steps, you will have prepared the closing entries for the Lakeside Grocery Store.