Accounting Made Simple 15

Question 1

1. What is the purpose of the Retained Earnings account?

Answer 1

to show all the net income that a business has earned over its life, excluding any income that has been distributed to shareholders.

Question 2

2. What is the purpose of using REVENUE and EXPENSE accounts?

Answer 2

to track the operations of a business over a period of time.

Question 3

3. How is, for example, this year’s RENT EXPENSE separated from last year’s RENT EXPENSE?

Answer 3

Through the CLOSING PROCESS.

Question 4

4. How do amounts earned actually get into the RETAINED EARNINGS account?

Answer 4

Through the CLOSING PROCESS.

Question 5

5. What are the TEMPORARY ACCOUNTS?

Answer 5

a. Revenue Accounts
b. Expense Accounts
c. Gain Accounts
d. Loss Accounts

Question 6

6. Explain the TEMPORARY ACCOUNTS.

Answer 6

A TEMPORARY ACCOUNT is a GENERAL LEDGER account that begins each accounting year with a zero balance.
At the end of the ACCOUNTING YEAR any balance in the account will be transferred to another account.
This is referred to as CLOSING THE ACCOUNT.

Question 7

7. What is an example of a TEMPORARY ACCOUNT?

Answer 7

the SALES ACCOUNT.

Question 8

8. The SALES ACCOUNT is used to:

Answer 8

keep a LOG OF THE SALES OCCURRING ONLY IN THE CURRENT ACCOUNTING YEAR.

Question 9

9. After the sales for the year have been reported, the balance in the SALES ACCOUNT will be:

Answer 9

transferred, or CLOSED, to another account, thereby returning the account balance to zero.

Question 10

10. TEMPORARY ACCOUNTS include:

Answer 10

ALL of the INCOME STATEMENT ACCOUNTS: Revenue, Expenses, Gains, and Losses.