Question

What would be the reason for a debit to income summary for $20,000 and a credit to capital for the same amount?

a. Recording net income
b. Recording net loss
c. Closing revenue accounts
d. Closing expense accounts

Answer 1

The journal entry with a debit to income summary and a credit to capital for $20,000 indicates the recording of net income, which increases the owner's equity as part of the closing entries.

Step-by-step explanation:

The reason for a debit to income summary for $20,000 and a credit to capital for the same amount is a. Recording net income. This journal entry is made at the end of an accounting period to transfer the net income from the income summary account to the owner's capital account.

The debit to Income Summary and credit to Capital signify an increase in the owner's equity, indicating that the business has generated a profit during the accounting period, thus contributing to a comprehensive and accurate representation of the financial activities.

This process is part of the closing entries that wrap up financial activities for the period. Since this entry involves debiting income summary (which had the revenues and expenses closed into it) and crediting capital, this action increases the owner's equity in the business, indicating the business made a profit.