The income statement for the Sage Hill Inc. for the month ended July 31 shows Service Revenue $17,470, Salaries and Wages Expense $8,870, Maintenance and Repairs Expense $3,370, and Income Tax Expense $1,470. The statement of retained earnings shows an opening balance for Retained Earnings of $20,520 and Dividends $1,760. Prepare closing journal entries.

Answer along with its Explanation:

The profit for the year is calculated as under:

Profit for the year = Revenue - Salaries and Wages - Maintenance and Repairs Expense - Income Tax Expense

Profit for the year = $17,470 - $8,870 - $3,370 -  $1,470 = $3,760

Now the entry would be to close the expense and income accounts for the year and carry forward the difference (Profit for the year) to retained earnings.

The entry would be as under:

Dr Service Revenue                       $17,470

Cr Salaries and Wages Expense                $8,870

Cr Maintenance and Repairs Expense      $3,370

Cr Income Tax Expense                               $1,470

Cr Retained Earnings (Balancing figure)   $3,760

The recording of the dividends (A decrease in Capital) would be decrease in the retained earnings which is given as under:

Dr Dividends $1,760

Cr Cash Balance   $1,760

The waiving off this amount will be by debiting the retained earnings and crediting dividends paid.

Dr Retained Earnings $1,760

Cr Dividends                       $1,760