At the end of the accounting period,but before closing entries are made,Harry,the proprietor of Harry's Bar and Grill,has a debit balance of $24,500 in his drawing account and a credit balance of $72,300 in his capital account.Which of the following statements is true?
A)Harry's net income was $47,800.
B)Harry will debit the drawing account for $24,500 and credit the capital account for $24,500.
C)Harry will debit the capital account for $24,500 and credit the drawings account for $24,500.
D)Harry's retained earnings account was $47,800.

Question

Quizplus · Accepted Answer

The drawing account is a temporary account that records all withdrawals made by the owner during the accounting period. The balance of the drawing account represents the total amount of withdrawals made by the owner during the period, which is considered a reduction of the owner's equity.

On the other hand, the capital account represents the owner's equity in the business, which includes the initial investment, additional investments, and the net income earned by the business.

Given that Harry's drawing account has a debit balance of $24,500, it means that Harry has withdrawn $24,500 more than what he has invested in the business during the period. This reduces his equity in the business.

On the other hand, the credit balance of $72,300 in Harry's capital account represents the total equity that he has in the business after considering his initial investment, additional investments, and share of net income earned by the business.

Therefore, to correct the accounting records and reflect the actual equity position, Harry needs to debit the capital account for $24,500 (to reduce his equity) and credit the drawing account for $24,500 (to reduce the balance of the temporary account). The corrected balances would be $47,800 in the capital account and $0 in the drawing account.

Thus, choice C is the correct answer.

At the End of the Accounting Period,but Before Closing Entries