Question

After the first two closing entries are made, Income Summary has a debit balance of $22,750. What does this indicate about the company’s net income or loss?

a) Net income of $22,750
b) Net loss of $22,750
c) No net income or loss
d) Cannot be determined from the information provided

Answer 1

A debit balance of $22,750 in the Income Summary after the first two closing entries indicate that the company has a net loss of $22,750.

Step-by-step explanation:

If after the first two closing entries, the Income Summary account has a debit balance of $22,750, this indicates the company has incurred a net loss of $22,750 for the period. Closing entries are made at the end of an accounting cycle to transfer the balances of temporary accounts (like revenues and expenses) to permanent accounts (like Retained Earnings). When the Income Summary has a debit balance after revenue and expense accounts have been closed, it means that expenses have exceeded revenues, which results in a net loss. The correct answer is option b) Net loss of $22,750.