Below is a summarized income statement for St Bruno Inc St B

Below is a summarized income statement for St. Bruno Inc. St. Bruno Inc. Income Statement for the Year Ended December 31, 2017 Revenue............... $5,125,000 Expenses ............... 3,225,000 Net income............... $1,900,000

a. Prepare a spreadsheet and make the entry that is necessary to close the temporary accounts. Assume the balance in retained earnings on December 31, 2016 was $13,750,000.

b. Prepare the journal entry necessary to close the temporary accounts.

c. What would be the effect on net income in 2018 if St. Bruno Inc. forgot to prepare the closing entry in 2017?

Solution

a and b)

Closing Entry

c)

Closing entries follow period-end adjustments in the closing cycle. Missing a closing entry causes misreporting of the current period’s retained earnings, and if not corrected, it creates errors in the current or next period’s financial reports.

In the above case, if the closing entry of 2017 is not passed, then the Net income of 2018 will be overstated by $ 1,900,000 which is the net balance of Income Summary of the previous period.