Mia started a new business on 1 January 2025 with the following assets and liabilities. $ Premises 150 000 Equipment 20 000 Inventory 8 000 Bank 12 000 Loan...
Question 1 Report
Mia started a new business on 1 January 2025 with the following assets and liabilities.
| $ | |
|---|---|
| Premises | 150 000 |
| Equipment | 20 000 |
| Inventory | 8 000 |
| Bank | 12 000 |
| Loan from bank | 40 000 |
(a) Calculate Mia's opening capital. [2]
(b) Show the opening journal entry in the books of Mia. [5]
(c) At 31 December 2025 the following closing balances were available.
| Dr $ | Cr $ | |
|---|---|---|
| Revenue | 280 000 | |
| Purchases | 165 000 | |
| Opening inventory | 8 000 | |
| Wages | 42 000 | |
| Rent | 18 000 | |
| General expenses | 7 000 |
Closing inventory was $10 000.
Show the journal entries to close the revenue and expense accounts to the income statement (trading and profit and loss) at 31 December 2025. [8]
(d) Explain why closing entries are necessary at the end of a financial year. [3]
(e) State what happens to the balance on the income statement account after the profit has been calculated. [2]
Answer Details
(a) Opening capital
Capital is found using the accounting equation: Capital = Total assets - Total liabilities.
Total assets = $150 000 + $20 000 + $8 000 + $12 000 = $190 000 [1]
Opening capital = $190 000 - $40 000 (loan) = $150 000 [1]
(b) Opening journal entry
| Account | Debit ($) | Credit ($) |
|---|---|---|
| Premises | 150 000 [1] | |
| Equipment | 20 000 | |
| Inventory | 8 000 | |
| Bank | 12 000 [1] | |
| Loan | 40 000 [1] | |
| Capital | 150 000 [1] | |
| Assets and liabilities introduced by Mia to start the business [1] | ||
All assets are debited (they are resources owned by the business). The loan is a liability and is credited. Capital is the owner's equity and is credited. Total debits ($190 000) equal total credits ($190 000).
(c) Closing journal entries at 31 December 2025
At the end of the financial year, all revenue and expense account balances are transferred to the income statement account. Revenue accounts (credit balances) are debited to close them; expense accounts (debit balances) are credited to close them.
| Entry | Account | Debit ($) | Credit ($) |
|---|---|---|---|
| 1 | Revenue | 280 000 [1] | |
| Income statement | 280 000 | ||
| 2 | Income statement | 165 000 [1] | |
| Purchases | 165 000 | ||
| 3 | Income statement | 8 000 | |
| Opening inventory | 8 000 [1] | ||
| 4 | Closing inventory | 10 000 | |
| Income statement | 10 000 [1] | ||
| 5 | Income statement | 42 000 | |
| Wages | 42 000 [1] | ||
| 6 | Income statement | 18 000 | |
| Rent | 18 000 [1] | ||
| 7 | Income statement | 7 000 | |
| General expenses | 7 000 [1] |
All amounts are correct. [1] The closing inventory entry (entry 4) differs from the others because closing inventory is a debit entry in the income statement (reducing cost of sales), so the income statement is credited and the closing inventory asset account is debited.
(d) Why closing entries are necessary
Closing entries transfer all revenue and expense balances to the income statement so that the profit or loss for the period can be calculated. [1] They also reset the revenue and expense accounts to zero [1] so that these accounts are ready to accumulate the transactions for the new accounting period. [1]
(e) What happens to the income statement balance after profit is calculated
The profit (the balance on the income statement account) is transferred to the capital account. [1] This is done by debiting the income statement account and crediting the capital account, which increases the owner's equity. [1]
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