Prepare journal entries to close the balances in temporary revenue and expense accounts. Remember to consider the entry for shrinkage from QS 5-9. (The solution from QS 5-9 is required to complete this question.) Record the entry to close the income statement accounts with credit balances

Complete Question:

Prepare journal entries to close the balances in temporary revenue and expense accounts. Remember to consider the entry for shrinkage from QS 5-9. (The solution from QS 5-9 is required to complete this question.) Record the entry to close the income statement accounts with credit balances.  Prepare the entry to record any inventory shrinkage.

Nix'it Company's ledger on July 31, its fiscal year-end, includes the following selected accounts that have normal balances. (Nix'it uses the perpetual inventory system.)  A physical count of its July 31 year-end inventory discloses that the cost of the merchandise inventory still available is $35,900.

Merchandise inventory    $37,800

T.Nix, Capital $115,300

T. Nix, Withdrawals $7,000

Sales $160,200

Sales Discounts $4,700

Sales Returns and allowances $6,500

Cost of goods sold $105,000

Depreciation expense $10,300

Salaries expense $32,500

Miscellaneous expense $5,000

Nix'it Company

Journal entries to close temporary accounts:

General Journal

Date: Description:                   Debit          Credit

July 31:

Income Summary                  $165,900

Sales Discounts                                         $4,700

Sales Returns and allowances                 $6,500

Cost of goods sold                                $105,000

Inventory Shrinkage                                  $1,900

Depreciation expense                            $10,300

Salaries expense                                   $32,500

Miscellaneous expense                          $5,000

To close debit balances to the income summary.

Sales                             $160,200

Income Summary                               $160,200

To close credit balance to the income summary.

Retained Earnings            5,700

Income Summary                                    5,700

To close the net loss to the Retained Earnings.

Inventory Shrinkage             1,900

Inventory                                                 1,900

To record the inventory shrinkage.

Explanation:

Inventory shrinkage occurs when the value of physical inventory count is less than  the system-generated inventory value.  This may be due to errors, pilferage, damage, or shortage from the supplier.

To record inventory shrinkage, an inventory shrinkage account is debited while the inventory account is credit.  This reduces the closing inventory by the shrinkage and increases the cost of goods sold equally.

Temporary accounts are normally closed to the income summary at the end of an accounting period in order to determine the financial performance of the entity.  These temporary accounts are revenues and expenses.  The other balances are called permanents accounts and will be used to prepare the balance sheet, which shows the financial position of the entity.  They are not closed because it will be carried forward to the next accounting period.  They include assets, liabilities, and equity balances.