Assume that Redlands, Inc. prepaid rent of $12 to San Diego Rentals for office space. The rental agreement was for one-year and signed on August 1, 2014.

Required: Make the necessary journal entries for both firms on August 1, 2014 and the adjusting entries on December 31, 2014.

San Diego Rentals

Date	Accounts	Debit	Credit
8/1/14

Redlands, Inc.

Date	Accounts	Debit	Credit
8/1/14

San Diego Rentals

Date	Accounts	Debit	Credit
12/31/14

Redlands, Inc.

Date	Accounts	Debit	Credit
12/31/14

Closing Accounts

Previous chapters have listed retained earnings in the statement of stockholders equity and the balance sheet. As defined previously, retained earnings represent all net income earned by the firm in its existence minus all of the dividends it declared. Technically, this workbook has only assumed the existence of retained earnings. An entity must record an account, such as retained earnings, in the book of original entry in order for the account to exist. Retained earnings, therefore, formally arises from the closing process of the accounting system. This process begins with two journal entries made at the end of an accounting period. Closing accomplishes two goals:

1. Closing eliminates the ending balances of the temporary accounts by resetting the balances in those accounts to zero. Revenue and expenses (or the income statement accounts) compose temporary accounts.
2. Closing transfers net income (or net loss) to retained earnings