Question

I am trying to Journalize the entries to close the accounts. We are dealing with a 7100 net loss. I know I need to debit Income Summary and credit retained earnings. I just can't figure out the amount.  

Retained earnings were 643600, and with a net loss of 7100, so I thought you would debit Income summary 636500 and credit Retained Earnings for the same, but that amount is not correct any assistance would be great.

"Referring back to my text book it says in the case of a net loss, I should then credit income summary for the amount of it's balance and debit the retained earnings for the amount of the net loss " this doesn't make sense to me as I know the correct entry is debit Income summary and credit retained earnings.

Thanks

Answer 1

The Income Summary is credited by the revenues and debited by the expenses. Profit arises when Revenues are greater than expenses i.e. credit in Income summary is greater than debits in Income summary resulting in a credit closing balance in Income Summary. To close the Income Summary Account, we then debit the balance in the Income summary account and credit the retained earnings. This results in ZERO balance in Income Summary account and an increase in Retained Earnings (Increase in Retained Earnings Indicates profits from the operations of the business).

However, when Revenue is less than the expenses, the business suffers a loss i.e. when credits in Income summary account is less than the debits in Income summary account, a situation of loss arises. In that scenario, Income Summary Account will have a debit closing balance. To close the Income Summary Account, we will have to credit Income Summary and debit Retained Earnings Account. This will result in closing of Income Summary Account and decrease of Retained Earnings. A decrease in Retained Earnings accounts indicates loss from the operations of the Business.

In you provided circumstances, you are dealing with a net loss of $7,100. Therefore, you will have to debit retained earnings and credit retained earnings with an amount of $7,100 (i.e. the balance in the Income Summary Account).

The Journal Entry Shall be:

Dr. Retained Earnings	$ 7,100
Cr. Income Summary		$ 7,100

After making the above mentioned journal entry, the Income Summary account will be closed and the Balance of Retained Earnings will stand at $636,500 (i.e. Opening balance of $643,600 reduced by the loss in current period of $7,100).

I hope your doubt will be cleared. If you still have any doubt, feel free to ask in comment section.