Question

For the year ended December 31, a company had revenues of $187,000 and expenses of $109,000. $37,000 in dividends were paid during the year. Which of the following entries could not be a closing entry?
a) debit retained earnings 37,000, credit dividends 37,000
b) debit revenues 187000, credit income summary 187000
c) debit income summary 78,000, credit retained earnings 78000
d) debit income summary 187000, credit revenues 187000
e) debit income summary 109000, credit expenses 109000

Answer 1

Answer:

D) Debit income summary 187000, credit revenues 187000

Explanation:

When dividend is declared, following journal entry is passed

Retained Earnings                                    Dr.

    To Dividend Payable

(Being declared dividend recorded)

When dividends are actually paid, the journal entry is

Dividend Payable A/C                              Dr.

     To Cash A/C

(Being dividend paid recorded)

Income summary account is prepared as a temporary account while income statement represents permanent account.

Income summary shows net income balance i.e Revenue less expenses.

As per the given information in the question, debiting income summary account with total revenues of $187000 would be wrong.