Accounting Made Simple 16

Question 1

1. CLOSING. After the amounts for the year have been recorded on the Income Statement, the balances on the TEMPORARY ACCOUNTS will end up:

Answer 1

in a PERMANENT ACCOUNT such as the corporation’s RETAINED EARNINGS account or in a SOLE PROPRIETOR’S CAPITAL ACCOUNT.

Question 2

2. In manual systems, the balances in the TEMPORARY ACCOUNTS will be transferred to:

Answer 2

an INCOME SUMMARY account, which will in turn be transferred to RETAINED EARNINGS or to the OWNER’S CAPITAL ACCOUNT.
Hence, the INCOME SUMMARY ACCOUNT is (in this case) also a TEMPORARY ACCOUNT.

Question 3

3. What is a TEMPORARY ACCOUNT that is NOT an INCOME STATEMENT ACCOUNT?

Answer 3

The PROPRIETOR’S DRAWING ACCOUNT.

Question 4

4. The balance in the DRAWING ACCOUNT is transferred:

Answer 4

directly to the owner’s capital account and will NOT be reported on the INCOME STATEMENT OR in an INCOME SUMMARY ACCOUNT.

Question 5

5. TEMPORARY ACCOUNTS are also referred to as:

Answer 5

NOMINAL ACCOUNTS.

Question 6

6. p.66
   When the TEMPORARY ACCOUNTS are ZEROED out, and since this is also a TRANSACTION and ALL TRANSACTIONS require at least two accounts, what is the other half of the Journal Entry?

Answer 6

an INCOME SUMMARY account.

Question 7

7. The purpose of zeroing out the balance in each of the TEMPORARY ACCOUNTS is to:

Answer 7

give them a fresh start for the next accounting period, to ensure that at any given time, the REVENUE ACCOUNT will show only the amount of revenue that has been earned so far in that period.
Ditto for the EXPENSE ACCOUNTS, GAIN ACCOUNTS, and LOSS ACCOUNTS.

Question 8

8. After all the TEMPORARY ACCOUNTS have been zeroed out, the balance in the INCOME SUMMARY ACCOUNT will:

Answer 8

have a CREDIT balance equal to the firm’s NET INCOME or a DEBIT balance equal to the firm’s NET LOSS.

Question 9

9. The balance in the INCOME SUMMARY ACCOUNT will then be:

Answer 9

zeroed out and transferred to RETAINED EARNINGS.