Question

For the year ended December 31, 2021, Pearl Enterprises Ltd. had the following revenues and expenses: Sales, $740,000; Cost of Goods Sold, $425,000; Operating Expenses, $130,000; and Income Tax Expense, $33,500. The company also declared $25,000 of dividends to the common shareholders on December 27 to be paid on January 15, 2022.

Prepare closing entries for Pearl on December 31, 2021. (Credit account titles are automatically indented when the amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.)

Date	Account Titles and Explanation	Debit	Credit
Dec. 31	enter an account title to close revenue account on December 31	enter a debit amount	enter a credit amount
	enter an account title to close revenue account on December 31	enter a debit amount	enter a credit amount
	(To close revenue account.)
Dec. 31	enter an account title to close expense accounts on December 31	enter a debit amount	enter a credit amount
	enter an account title to close expense accounts on December 31	enter a debit amount	enter a credit amount
	enter an account title to close expense accounts on December 31	enter a debit amount	enter a credit amount
	enter an account title to close expense accounts on December 31	enter a debit amount	enter a credit amount
	(To close expense accounts.)
Dec. 31	enter an account title to close Income Summary on December 31	enter a debit amount	enter a credit amount
	enter an account title to close Income Summary on December 31	enter a debit amount	enter a credit amount
	(To close Income Summary.)
Dec. 31	enter an account title to close dividends on December 31	enter a debit amount	enter a credit amount
	enter an account title to close dividends on December 31	enter a debit amount	enter a credit amount
	(To close dividends.)

Answer 1

• Requirements

Date	Accounts title	Debit	Credit
31-Dec	Sales	$740,000
	Income Summary		$740,000
	(to close revenues)
31-Dec	Income Summary	$588,500
	Cost of Goods Sold		$425,000
	Operating expense		$130,000
	Income tax expense		$33,500
	(to close expenses)
31-Dec	Income Summary	$151,500
	Retained earnings		$151,500
	(to close Income Summary - Net Income)
31-Dec	Retained earnings	$25,000
	Dividends		$25,000
	(to close dividend)

General Concepts regarding Closing entries:

#1:Temporary accounts, like Revenue accounts, have normal CREDIT balances, and hence they are closed by DEBITING the account.

#2:Temporary accounts, like Expense accounts or Contra revenue accounts, have normal DEBIT balances, and hence they are closed by CREDITING the account.

#3: In case of Net Income, Income Summary account has a CREDIT balance, and in order to close the Income Summary account, we DEBIT the account, and Credit Retained earnings/Owner's Capital

#4: In case of Net Loss, Income Summary account has a DEBIT balance, and in order to close the Income Summary account, we CREDIT the account, and Debit Retained earnings/Owner's Capital

#5: Dividend accounts have normal DEBIT balance, and are closed by CREDITING them, and debiting Retained earnings account.

#6: Drawings or Withdrawal account have a normal DEBIT balance, and hence closed by CREDITING the account, and debiting Owner's Capital account.