Question

For the year ended December 31, a company has revenues of $317,000 and expenses of $196,000. The company paid $50,000 in dividends during the year. The balance in the Retained earnings account before closing is $81,000. Which of the following entries would be used to close the dividends account?

a. Debit Retained earnings $53,200; credit Dividends $53,200.
b. Debit Dividends $53,200, credit Retained earnings $53,200.
c. Debit Income Summary $53,200; credit Retained earnings $53,200.
d. Debit Retained earnings $89,000, credit Income Summary $89,000
e. Debit Income Summary $89,000, credit Dividends $89,000

Answer 1

Answer:

a. Debit Retained earnings $53,200; credit Dividends $53,200.

Explanation:

When we close the journal entries, we close all the temporary accounts such as revenues, expenses, and dividends. Closing means the balance of revenues, expenses, and dividends will be "0". To make "0" balance of any temporary accounts, we have to reverse the balance as normal balance. For example - Service revenue is a credit balance. If we close it, we have to make service revenue as a debit account. Similarly, to close the dividends account,

The journal entry to record the closing of dividends is -

Retained earnings (Debit)

Dividends (Credit)