On December 31, the Income Summary account of Madison Company has a debit balance of $25,000 after revenue of $27,000 and expenses of $52,000 were closed to the account. Madison Wells, Drawing has a debit balance of $2,800 and Madison Wells, Capital has a credit balance of $46,000.

Required:

1. Record the journal entries necessary to complete closing the accounts.

2. What is the new balance of Madison Wells, Capital

Dr Capital $25,000

Cr Income summary $25,000

Being loss recorded in the year written off to capital account

Dr Capital $2,800

Cr Drawings $2,800

Being drawings for the year

The new balance in the capital account is $18,200

Explanation:

The journal entries required to close the accounts a credit of $25,000 in the income summary and a corresponding debit to capital account since the loss made must be reflected in owner's equity.

Also, the drawings amount in the year should now be credited to drawings account and debited to capital account to reflect the withdrawal in owner's equity as well.

The new balance in the capital account is as follows:

Opening capital balance $46,000

Loss recorded ($25,000)

drawings ($2,800)

Closing capital $18,200