Question

A hotel accountant enters a credit to the Income Summary account and a debit to Owners' Equity. If this entry is a closing entry, the hotel: ?

1) spent and earned equal amounts this accounting period.
2) defaulted on a loan during this accounting period.
3) had expenses in excess of revenues for this accounting period.
4) earned more than it spent this accounting period

Answer 1

A hotel accountant's entry with a credit to Income Summary and a debit to Owners' Equity during a closing entry suggests the hotel 4) earned more than its expenses, indicating a net profit for the period.

Step-by-step explanation:

When a hotel accountant enters a credit to the Income Summary account and a debit to Owners' Equity, and this entry is a closing entry, it indicates that the hotel earned more than it spent during the accounting period. This is because the closing entry is used to transfer the net income (or loss) to the owners' equity. A credit to Income Summary signifies that the revenues exceeded expenses, hence net income.

Subsequently, a debit to Owners' Equity decreases it. Therefore, this represents that the retained earnings (part of owners' equity) are being reduced because of the distribution of net income to the owners in the form of dividends or withdrawals.