Question

After closing the revenue and expense accounts, the income summary showed a credit balance of $2,500 with a balance of $1,000 in the withdrawals account. Based on just this information, which of the following statements is true?

a. Net income is $2,500
b. Net loss is $1,500
c. Net income is $1,500
d. Net loss is $2,500

Answer 1

The correct statement, based on the information provided regarding the income summary and withdrawals account, is that the net income is $1,500 after accounting for the owner's withdrawals from the business.

Step-by-step explanation:

The question concerns the closing entries in accounting, specifically the determination of the net income or net loss from the information provided. When the revenue and expense accounts have been closed to the income summary, the income summary account will reflect net income if it has a credit balance. Based on the information given, that the income summary shows a credit balance of $2,500 and there is a balance of $1,000 in the withdrawals account, we can calculate the owner's equity impact.

Net income is calculated as the credit balance in the income summary before withdrawals. Therefore, the net income is $2,500. However, after accounting for withdrawals, which represent owner's draws from the business, the residual amount that is added to the owner's equity is $1,500 ($2,500 net income - $1,000 withdrawals). Therefore, the correct statement is c. Net income is $1,500.