Close a more complex set of accounts with reduced scaffolding
Sarah's March was straightforward — one revenue account, four expenses, no dividends. Now let's make it more realistic. Her business has grown, and the April adjusted trial balance looks more complicated.
Your job: work through all four closing steps for this new set of accounts. The procedure is the same, but there are more accounts to track and one extra wrinkle.
TechStart Solutions — Adjusted Trial Balances (April 30)
| Account | Balance | Normal Side |
|---|---|---|
| Service Revenue | $12,400 | Credit |
| Interest Revenue | $45 | Credit |
| Rent Expense | $1,500 | Debit |
| Salaries Expense | $3,200 | Debit |
| Depreciation Expense | $75 | Debit |
| Supplies Expense | $480 | Debit |
| Utilities Expense | $210 | Debit |
| Dividends | $800 | Debit |
Your Task
Work through all four closing steps. For each step, write the journal entry and calculate the running balance in Income Summary.
Step 1: Close all revenue accounts. What is the total credit to Income Summary?
Step 2: Close all expense accounts. What is the total debit to Income Summary?
Step 3: Close Income Summary to Retained Earnings. Is it net income or net loss? What amount?
Step 4: Close Dividends to Retained Earnings.
Watch Out
There are now two revenue accounts and five expense accounts. Each one must be closed individually — do not combine them into one line unless the problem explicitly tells you to. Also, remember that Dividends is NOT an expense. It closes directly to Retained Earnings, not through Income Summary.
Answer the questions below. These test not just whether you can compute the entries, but whether you understand why each step works the way it does.
1. Sarah's business now has two revenue accounts: Service Revenue ($8,700) and Interest Revenue ($45). What is the correct Step 1 closing entry?
2. After closing revenues ($8,745) and expenses ($5,200) to Income Summary, what is the balance in Income Summary before Step 3?
3. Sarah's Retained Earnings had a beginning balance of $12,000. Net income is $3,545 and she paid $800 in dividends. What is the ending Retained Earnings after all closing entries?
Step 1: Close Revenues
DR Service Revenue ............ $12,400
DR Interest Revenue ............ $45
CR Income Summary ............ $12,445
Income Summary balance: $12,445 credit
Step 2: Close Expenses
DR Income Summary ............ $5,465
CR Rent Expense ............ $1,500
CR Salaries Expense ............ $3,200
CR Depreciation Expense ............ $75
CR Supplies Expense ............ $480
CR Utilities Expense ............ $210
Income Summary balance: $12,445 CR − $5,465 DR = $6,980 credit
Step 3: Close Income Summary
DR Income Summary ............ $6,980
CR Retained Earnings ............ $6,980
Net income of $6,980. Income Summary is now $0.
Step 4: Close Dividends
DR Retained Earnings ............ $800
CR Dividends ............ $800
Dividends is now $0. Retained Earnings increased by $6,980 − $800 = $6,180 net.