Describe the entry that is made to transfer net income into the owner's capital account. Include...

Describe the entry that is made to transfer net income into the owner's capital account. Include the reason this entry should be made and how income will be listed if transfer is not recorded.

Expert Solution

Answer

Accounts Titles and Explanation	Debit	Credit
Retained earnings	XXXX
Owner's Capital		XXXX
(Being retained earnings transfered)

Debit the Retained Earnings and credit the Owner's Capital account for the net income amount transfered.

Reason :

Retained earnings are liability. Transfer of the same results in decrease in the liability and therefore, it is debited. Whereas, owner's capital is a liability and transfer of retained earnings will increase the liability (owner's capital). Therefore, it is credited.

Further, if the transaction is not made, the net income will be shown as retained earnings and will not be included in the owner's capital account. If the entity is a corporation, it is appropriate to use Retained earnings, but in a sole proprietorship or partnership the net income is posted directly to the owner's capital account.

Should you have any query, please comment.

Good luck!

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