Accounting Chap 6 Flashcards
Used for three major end-of-period activities:
Journalizing adjusting entries
Preparing financial statements
Journalizing closing entries
THE WORK SHEET
PREPARING FINANCIAL STATEMENTS
1st: Prepare the income statement.
2nd: Prepare the statement of owner’s
equity.
3rd: Prepare the balance sheet.
The Financial Statements Appearance 1. Dollar signs are placed at the \_\_\_ and \_\_\_ rulings. 2. Single rulings indicate \_\_\_. 3. Double rulings are placed under \_\_\_. 4. Headings contain the: a) company name b) statement title c) period ended or date
top of each column
beneath
addition or subtraction
totals
___ of financial statements relate to who, what, and when.
Headings
___ columns of the work sheet provide the information needed to prepare the income statement.
___ is listed first on income statement.
Income Statement
Revenue
___ are listed after revenue on income statement.
a) They could be listed in the ___ that they appear in the chart of accounts.
b) They could be listed in ___ order by dollar amount.
c) Amounts are itemized in the ___ column, when two columns are used.
d) Subtotals appear in the ___ column.
Expenses
same order
descending
left
right
Income Statement Equation
___ – ___ = Net Income or Net Loss
Revenues
Expenses
The Statement of Owner’s Equity Information is taken from the ___ columns of the work sheet and Net income/loss from the ____.
Balance Sheet
Income Statement
What information is taken from the Balance Sheet columns of the work sheet to prepare the Statement of Owner’s Equity
Capital account balance & Drawing account balance
The Balance Sheet Information is taken from the ___ columns of the work sheet and Ending balance from the ____.
Balance Sheet
Statement of Owner’s Equity
Types of balance sheets
a) Report form
b) Account form
c) Classified balance sheet
1st important feature of Balance sheet type where The liabilities and owner’s equity are shown below the assets section.
Report form balance sheets
Balance sheet type where
(1) The assets are listed on the left.
(2) The liabilities and owner’s equity sections are listed on the right.
Account form balance sheets
2nd important feature of Balance sheet type where
(1) Similar items are grouped together.
(2) The major balance sheet classifications are
generally used ie: Current assets, Property, plant, equipment, Current Liabilities, Long-term liabilities or long-term debt
Classified balance sheet
___ include cash and items that will be converted into cash within one year or the normal operating cycle of the business whichever is longer.
Current assets
An ___ is the period of time required to purchase supplies and services and convert them back into cash.
operating cycle
Property, plant, and equipment, also called ___ or ___ assets, are assets that are expected to serve the business for many years.
plant assets
long-term
___ include accounts payable, wages payable, and other items due within one year or the normal operating cycle.
Current liabilities
___ or ___ are obligations that are not expected to be paid within a year and do not require the use of current assets
Long-term liabilities
long-term debt
CLASSIFIED BALANCE SHEET
Similar items are grouped together Assets are classified as: Current Assets Property, Plant, and Equipment Liabilities are classified as: Current Liabilities Long-Term Liabilities
Assets (including cash) that will be converted into cash or consumed within one year or the normal operating cycle, whichever is longer
Examples:
Cash, accounts receivable, supplies, and prepaid insurance
CURRENT ASSETS
Assets that are expected to serve the business for many years
Also called plant assets or long-term assets
Examples:
Land, buildings, and equipment
PROPERTY, PLANT, AND EQUIPMENT
Liabilities that are due within one year or the normal operating cycle of the business, whichever is longer
They will be paid out of current assets
Examples:
Accounts payable
Wages payable
CURRENT LIABILITIES
Obligations that are not expected to be paid within a year and do not require the use of current assets
Also called long-term debt
Example:
A mortgage on an office building
LONG-TERM LIABILITIES
Gives temporary accounts “zero” balances so they are prepared to
accumulate new information for the next accounting period
Involves “four” closing journal entries
The income summary (expense and revenue summary) account is used to aid in the closing process
THE CLOSING PROCESS
Contain the results of all transactions since the business started, their balances are carried forward to each new accounting period. All accounts reported on the balance sheet
Assets (including contra-assets)
Liabilities
Capital account
These accounts are ___ at end of fiscal year
PERMANENT ACCOUNTS
NOT CLOSED
Accumulate information for a specific (one) accounting period
All accounts not on the balance sheet
Revenues
Expenses
Drawing
These accounts are ___ at end of fiscal year
TEMPORARY ACCOUNTS
CLOSED
Accounts reported on the balance sheet are ___ and remain ___. All other accounts (those reported on the income statement and drawing) are ___ and ___.
permanent
open
temporary
closed
Income Summary is a ___ owner’s equity account used in the closing process to give accounts which are temporary a zero balance.
temporary
Steps in the Closing Process
Step 1: Close Revenue Accounts to Income Summary
Step 2: Close Expense Accounts to Income Summary
Step 3: Close Income Summary to Owner’s Capital Account
Step 4: Close Drawing to the Owner’s Capital Account
Close Revenue Accounts to Income Summary.
a) ___ the revenue accounts.
b) ___ Income Summary.
Debit
Credit
Close Expense Accounts to Income Summary.
a) ___ Income Summary.
b) ___ the expense accounts.
Debit
Credit
Close Income Summary to Owner’s Capital Account
If Net income (credit bal)
(1) ___ Income Summary.
(2) ___ the owner’s capital account.
If Net loss (debit bal)
(1) ___ the owner’s capital account
(2) ___ Income Summary.
Debit
Credit
Debit
Credit
Close Drawing to the Owner’s Capital Account.
a) ___ the owner’s capital account.
b) ___ Drawing.
Debit
Credit
Journalize Closing Entries
- Journalize the closing entries on the year-end date.
- Write “Closing Entries” in the Description column prior to making the first closing entry.
- Explanations are not required in the Description column for individual closing entries.
- Make one compound entry to close the expense accounts.
Post the Closing Entries
- Post to the general ledger in the same manner as all other entries.
- Write “Closing” in the Item column of the general ledger to identify the closing entries.
- Zero account balances are recorded by drawing a line in both the Balance Debit and Credit columns.
Prepared after closing entries To prove the equality of the debit and credit balances in the general ledger accounts
Only permanent accounts that remain open are listed
POST-CLOSING TRIAL BALANCE
All amounts reflected on the post-closing trial balance are the ___ as in the Balance Sheet columns of the work sheet except ___ and ___ which are changed during the closing process.
same
drawing
capital
The Accounting Cycle (During Accounting Period)
- Analyze source documents.
- Journalize the transactions.
- Post to the general ledger accounts.
Operating Cycle for a Service Business
- Start with Cash
- Purchase Supplies and Services
- Provide Services for Cash and “On Account”
- Collect Receivables
- Back to Cash
One benefit of using the ___ account is that its balance before closing to the capital account equals the net income or net loss for the period. It can serve as a check of the accuracy of the closing entries for revenues and expenses even though not really needed for closing process.
Income Summary
Steps involved in accounting for all of the business activities during an accounting period. Begins with analysis of source documents and ends with post-closing trial balance.
Accounting cycle
The Accounting Cycle (End of Accounting Period)
*Performed as of the last day
- Prepare a trial balance.
- Determine and prepare the needed adjustments on the work sheet.
- Complete an end-of-period work sheet.
- Journalize and post the adjusting entries.
- Prepare an income statement, a statement of owner’s equity, and a balance sheet.
- Journalize and post the closing entries.
- Prepare a post-closing trial balance.
