Here is a problem that I just got stumped on:

S & X co. is a retail store owned solely by Paul Turner. During the month of November, the equity accounts were affected by the following events:

Nov. 9 Turner invested an additional $15,000 in the business.
Nov. 15 Turner withdrew $1,500 for his salary for the first two weeks of the month.
Nov. 30 Turner withdrew $1,500 for his salary for the second two weeks of the month.
Nov. 30 S & X distributed $1,000 of earnings to turner.

Instructions

a. assuming that the business is organized as a sole proprietorship:

1. prepare the journal entries to record the above events in the accounts of S & X
2. Prepare the closing entries for the month of November. Assume that after closing all the revenue and expense accounts the income summary account has a balance of $5,000.

Hint: record the investment in a separate capital account and the withdrawal (salary) in a separate drawing account. Close the drawing account into the capital account as part for the closing entries.

attached is what I have done so far, but what would the $1,000 distributed to turner be considered, net income, retained earnings,? I don't even know if I'm really going in the right direction. Any help would be greatly appreciated.

6147

I'm not sure cause I'm canadian and some accounting rules differ between countries, not knowing where you are from, but the distribution of the earnings under a sole prop. Would be considered part of his drawings.

I really dont think im doing this right. Can someone review and let me know if Im in the right direction. There should be a a credit to turner, capital for $5,000 in the journal entry. Thank you:o
6156

Don't know if it's too late for this. I just reinstalled Windows clean and have not installed all my other programs yet, and I just got around to installing Excel last night and wasn't able to look at this.

The first entry for the additional investment is correct. But after that... well, how do I say politely that it's all messed up? :-)

I guess you get the idea to treat the "salary" as drawing. Anything the owner takes out is always drawing, regardless of what they call it. But here's what you need to think about. Equity is a credit balance. That is why capital is a credit. It's on the right (credit) side of your equation. But drawing decreases equity. If equity is a credit, and you want to decrease it, what would you have to do?

Also, when the owner takes out a drawing, what are they actually taking out? A "drawing" isn't a thing. It's just the name of something. The word isn't worth anything. What, literally, are they actually taking from the company?

As for closing. You're closing net income, not the investment. You don't close investments. The idea of closing an account is to get rid of its balance to net it back to zero to start over for the new year. You close revenues, expenses and drawings. Those are your temporary accounts. We keep track of those for a period, keep accumulating them, and then when a new year starts they all start back at zero. It's just like your pay check. Each new year you start over.

Permanent accounts are those that don't close. Like cash can't close. If you have $10,000 in cash, then that's what you have. It doesn't go anywhere just because we go from Dec. 31 to Jan. 1. All of your assets and liabilities are like that. They're permanent. The balances don't change. They just carry over into the new year.

Now equity is split up. The drawing does close. But the capital does not. The capital represents how much worth the owner has in the company. That, again, is not going to change going from Dec. 31 to Jan. 1. That number remains the same. So you can't close an investment. It didn't go anywhere.

You're closing net income. The problem is having you skip a step. You first close revenues to income summary. You then close expenses to income summary. What you've just accomplished is moving the revenue and expense balances into income summary. And revenue and expenses net out to net income. So the number they're giving you for the income summary account, the $5000, is net income. That's what you need to close. And what would net income do to capital? Increase or decrease?

Then drawing is closed last. And what does it do to capital?

Try to straighten out your initial entries first and see if you understand that part. Closing is really a separate thing, and you can work on that separately also.

See what you can do with this and then re-submit for more help if you need it.