At the end of the accounting period,but before closing entries are made,Harry,the proprietor of Harry's Bar and Grill,has a debit balance of $24,500 in his drawing account and a credit balance of $72,300 in his capital account.Which of the following statements is correct?
A) Harry's net income was $47,800.
B) During the closing process, Harry will debit the drawing account for $24,500 and credit the capital account for $24,500.
C) During the closing process, Harry will debit the capital account for $24,500 and credit the drawing account for $24,500.
D) Harry's Retained Earnings account was $47,800.

Question

Quizplus · Accepted Answer

This situation indicates that Harry withdrew more money from the business than his share of profits for the period. The withdrawals or drawings account has a debit balance, which means that Harry took out more money than he put in. The opposite is true for the capital account, which has a credit balance.

To close the drawing account and transfer the excess withdrawals to the capital account, Harry will need to debit the capital account and credit the drawing account for the same amount. In this case, the amount is $24,500.

Therefore, during the closing process, Harry will debit the capital account for $24,500 and credit the drawing account for $24,500. This will result in a new balance of $47,800 in the capital account, which represents Harry's share of the net income for the period.

Option A is incorrect because there is not enough information to determine the amount of net income. Option B is incorrect because Harry needs to debit the capital account, not the drawing account, to close the drawing account. Option D is incorrect because there is no information provided about the retained earnings account.

At the End of the Accounting Period,but Before Closing Entries