Temporary Accounts and Their Normal Balances

Oct 13, 2025 by wbrum.org 99 views

Understanding the Importance of Closing Entries

As a merchandiser, Emiko Company needs to prepare closing entries to ensure accurate financial reporting and compliance with accounting standards. Closing entries are a crucial step in the accounting cycle, as they transfer temporary account balances to permanent accounts, providing a clear picture of the company's financial position. In this exercise, we will use the December 31 adjusted trial balance of Emiko Company to journalize closing entries for the temporary accounts.

Temporary Accounts and Their Normal Balances

The following list includes temporary accounts from the December 31 adjusted trial balance of Emiko Company:

Account	Normal Balance
Sales Revenue	Debit
Cost of Goods Sold	Debit
Sales Discounts	Debit
Sales Returns and Allowances	Debit
Freight In	Debit
Purchases	Debit
Purchase Discounts	Debit
Purchase Returns and Allowances	Debit
Freight Out	Debit
Accounts Receivable	Credit
Inventory	Credit
Accounts Payable	Credit

Journalizing Closing Entries

To prepare closing entries, we need to transfer the temporary account balances to permanent accounts. The following steps outline the journalizing process:

Step 1: Close Sales Revenue and Cost of Goods Sold

Sales Revenue: Since Sales Revenue is a temporary account, we need to close it to the Income Summary account. The closing entry will be:

Debit: Income Summary ($100,000) Credit: Sales Revenue ($100,000)

* **Cost of Goods Sold**: Similarly, we need to close Cost of Goods Sold to the Income Summary account. The closing entry will be: ```markdown

Debit: Income Summary ($80,000) Credit: Cost of Goods Sold ($80,000)

Step 2: Close Sales Discounts and Sales Returns and Allowances

Sales Discounts: Since Sales Discounts is a temporary account, we need to close it to the Income Summary account. The closing entry will be:

Debit: Income Summary ($5,000) Credit: Sales Discounts ($5,000)

* **Sales Returns and Allowances**: Similarly, we need to close Sales Returns and Allowances to the Income Summary account. The closing entry will be: ```markdown

Debit: Income Summary ($10,000) Credit: Sales Returns and Allowances ($10,000)

Step 3: Close Freight In and Purchases

Freight In: Since Freight In is a temporary account, we need to close it to the Inventory account. The closing entry will be:

Debit: Inventory ($20,000) Credit: Freight In ($20,000)

* **Purchases**: Similarly, we need to close Purchases to the Inventory account. The closing entry will be: ```markdown

Debit: Inventory ($150,000) Credit: Purchases ($150,000)

Step 4: Close Purchase Discounts and Purchase Returns and Allowances

Purchase Discounts: Since Purchase Discounts is a temporary account, we need to close it to the Inventory account. The closing entry will be:

Debit: Inventory ($10,000) Credit: Purchase Discounts ($10,000)

* **Purchase Returns and Allowances**: Similarly, we need to close Purchase Returns and Allowances to the Inventory account. The closing entry will be: ```markdown

Debit: Inventory ($20,000) Credit: Purchase Returns and Allowances ($20,000)

Step 5: Close Freight Out and Accounts Payable

Freight Out: Since Freight Out is a temporary account, we need to close it to the Inventory account. The closing entry will be:

Debit: Inventory ($30,000) Credit: Freight Out ($30,000)

* **Accounts Payable**: Similarly, we need to close Accounts Payable to the Inventory account. The closing entry will be: ```markdown

Debit: Inventory ($50,000) Credit: Accounts Payable ($50,000)

Step 6: Close Accounts Receivable and Inventory

Accounts Receivable: Since Accounts Receivable is a temporary account, we need to close it to the Income Summary account. The closing entry will be:

Debit: Income Summary ($100,000) Credit: Accounts Receivable ($100,000)

* **Inventory**: Similarly, we need to close Inventory to the Income Summary account. The closing entry will be: ```markdown

Debit: Income Summary ($200,000) Credit: Inventory ($200,000)

Closing Entries Summary

The following table summarizes the closing entries:

Account	Debit	Credit
Income Summary	$285,000
Sales Revenue		$100,000
Cost of Goods Sold		$80,000
Sales Discounts		$5,000
Sales Returns and Allowances		$10,000
Freight In	$20,000
Purchases	$150,000
Purchase Discounts		$10,000
Purchase Returns and Allowances		$20,000
Freight Out	$30,000
Accounts Payable		$50,000
Accounts Receivable	$100,000
Inventory	$200,000

Conclusion

In conclusion, closing entries are a crucial step in the accounting cycle, as they transfer temporary account balances to permanent accounts. By journalizing closing entries, we can ensure accurate financial reporting and compliance with accounting standards. The closing entries for Emiko Company have been prepared using the December 31 adjusted trial balance, and the summary table provides a clear picture of the company's financial position.