CH4 Flashcards
What are the steps of preparing a worksheet?
- Prepare a trial balance on the worksheet.
- Enter the adjustments in the adjustments’ column.
- Enter adjusted balances in the adjusted trial balance columns.
- Extend adjusted trial balance amounts to appropriate financial statement columns.
- Total the statement columns, compute the net income (or net loss), and complete the worksheet.
What is Keying?
A different letter identifies the debit and credit for each adjusting entry. The term used to describe this process is keying.
What is meant by Closing the Book?
At the end of the accounting period, the company makes the accounts ready for the next period by transferring the temporary account balances to the permanent owners’ equity account, by means of closing entries.
What are closing entries?
Closing entries are journal entries made at the end of an accounting period to transfer the balances of temporary accounts to permanent accounts, by the help of another temporary account, the Income Summary account. This process resets the temporary accounts to zero for the next accounting period.
How are closing entries made?
Companies record closing entries in the general journal. Then the company posts the closing entries to the ledger accounts. Companies generally prepare closing entries directly from the adjusted balances in the ledger:
- Debit each revenue account for its balance, and credit Income Summary for total revenues.
- Debit Income Summary for total expenses, and credit each expense account for its balance.
- Debit Income Summary and credit Owner’s Capital for the amount of net income.
- Debit Owner’s Capital for the balance in the Owner’s Drawings account, and credit Owner’s Drawings for the same amount.
What are temporary accounts?
Temporary accounts relate only to a given accounting period. They include all income statement accounts and the owner’s drawings account. The company closes all temporary accounts at the end of the period.
What are Permanent Accounts?
Permanent accounts relate to one or more future accounting periods. They consist of all balance sheet accounts, including the owner’s capital account. Permanent accounts are not closed from period to period. Instead, the company carries forward the balances of permanent accounts into the next accounting period.
What are the differences between Correcting Entries and Adjusting Entries?
- Adjusting entries are an integral part of the accounting cycle. Correcting entries, on the other hand, are unnecessary if the records are error-free.
- Companies journalize and post adjustments only at the end of an accounting period. In contrast, companies make correcting entries whenever they discover an error.
- Adjusting entries always affect at least one balance sheet account and one income statement account. In contrast, correcting entries may involve any combination of accounts in need of correction. Correcting entries must be posted before closing entries.
What are the differences between classified balance sheet and an unclassified balance sheet?
- A classified balance sheet categorizes assets, liabilities, and equity into detailed subgroups for clarity, while an unclassified balance sheet presents assets, liabilities, and equity without further categorization.
- Organized into sections like Current & Non-Current Assets, Current & Long-Term Liabilities.
Simple, listing assets and liabilities in a general manner.
- More detailed and structured.
Less detailed, providing only broad totals.
- A classified balance sheet provides more structure and organization for better financial analysis.
A regular (unclassified) balance sheet is simpler but may lack clarity for external users.
What is Operating Cycle?
The operating cycle of a
company is the average time that it takes to purchase inventory, sell it on account, and then
collect cash from customers.
