Before closing journal entries, Entity R had the following balances at December 31, 20x1:

Sales revenue

$150,000

Cost of goods sold

80,000

Salaries expense

20,000

Rent expense

15,000

Other expenses

5,000

Retained earnings before closing

42,000

(1) Prepare journal entries to close revenue and expense accounts.

        Journal entry to close revenue account

Sales revenue

150,000

   Income summary

150,000

        Journal entry to close expense accounts

Income summary

120,000

   Cost of sales

80,000

   Salaries expense

20,000

   Rent expense

15,000

   Other expenses

5,000

        Income summary account before the balance transfer to retained earnings

Income

Summary

80,000

80,000

20,000

15,000

5,000

30,000

                

        [Note]

        Net income = Revenue - Expenses = $150,000 - $120,000 = $30,000

(2) Prepare the journal entry to close revenue and expense accounts.

        Journal entry to transfer the balance of income summary account to retained earnings

Income summary

30,000

   Retained earnings

30,000

        Income summary account after the balance transfer to retained earnings

Income

Summary

80,000

80,000

20,000

15,000

5,000

30,000

0

Retained

Earnings

42,000

30,000

72,000

        

        [Note]

Retained earnings after closing = Retained earnings before closing + Net income = 42,000 + 30,000 = 72,000