A company has the following adjusted trial balance:. Account Debit Credit Cash $1,100 Accounts Receivable 1,000 Inventory 1,900 Supplies 1,800 Prepaid Rent 400 Land 5,800 Building 40,500 Accumulated Depreciation—Building $8,900 Accounts Payable 7,800 Unearned Revenue 4,000 Notes Payable, due 2020 2,400 Common Stock 6,600 Retained Earnings 3,200 Dividends 900 Service Revenue 32,200 Rent Expense 1,500 Supplies Expense 1,200 Salaries Expense 6,100 Depreciation Expense—Building 1,000 Utilities Expense 1,900 Totals $65,100 $65,100 Which closing entry is needed?

Debit Retained Earnings $900 and credit Dividends $900

Explanation:

When accounting for dividends at the end of the year they should be removed from the Retained Earnings because this is the account that they will be funded from.

As Retained Earnings is an Equity account, when it is reduced it will be debited so in this case the $900 for dividends will be debited. The Dividends being a temporary account are debited when the Dividends are declared by the company during the year.

When the company wants to close off the account they will then transfer it to the Retained Earnings account by crediting it.

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