116 Accounting for Non-Accountants
Figure 7.16:
JOURNAL
Page 5 Date Entries Ref.
Amounts Debits
Credits
2010 Jan 31
Sales
$5,500.00
Cost of Goods Sold
$2,200.00
Salaries Expense
100.00
Insurance Expense
41.67
Depreciation Expense
166.66
Interest Expense
133.33
Bad Debt Expense
50.00
Retained Earnings
2,808.34
Each Revenue and Expense account is closed (brought to a zero balance) by 1) determining the balance of the account and 2) placing this amount (the account balance) on the opposite side of the account; that is, a debit balance for an account is balanced out on the credit side of the journal, and a credit balance is balanced out on the debit side. For example, prior to closing, the sales account had a credit balance of $5,500. To close the sales account, it was debited for $5,500 to achieve the desired zero balance. The Cost of Goods Sold account had a debit balance of $2,200; thus, to close this account it was credited for $2,200. After all of the Revenues and Expenses have been closed (made to have a zero balance), and the debits and credits are added in the journal, there will be a dollar difference. In the example, this difference is the difference between the sales debit and the credits for the various Expenses: $2,808.34. This represents Net Income for the month of January. In order to make the closing entry balance an additional credit is needed; this credit is to Retained Earnings. As you learned in previous lessons, Retained Earnings is the account where profits are accumulated from year to year.