Chapter 3 Kieso

Question 1

2. Debits and credits: How are debits and credits used to change the balances in the different types of accounts?

Answer 1

The terms debit (Dr.) and credit (Cr.) refer to the left and right sides of a general ledger account, respectively. These terms do not mean increase or decrease. They are used repeatedly in the recording process to describe where entries are made. For ex. the act of entering an amount on the left side of an account is called debiting the account and an entry on the right side is crediting the account. When the totals of the two sides are compared, an account will have a debit balance if the total of the debit amounts is more than the credits and an account will have a credit balance if the credit amounts exceed the debits.

Question 2

3. Accounting equation (Balance sheet equation) : What are the basic and expanded accounting equations? What is a “double-entry” accounting system and how is it related to the accounting equation?

Answer 2

In a double-entry system, for every debit there must be a credit, and vice versa.
The basic accounting equation: Assets = Liabilities + Shareholder’s Equity

The expanded accounting equation: Assets = Liabilities + Common Shares + Retained Earnings - Dividends + Revenues - Expenses

The equality of debit and credits is the basis for the double-entry system of recording transactions (a.k.a. double-entry bookkeeping). Under the double-entry accounting system, which is used for accounting around the world, the two-sided (dual) effect of each transaction is recorded in appropriate accounts. This system gives a logical method for recording transactions. It also offers a way of proving the accuracy of the recorded amounts. Every transaction is recorded with total debits equal to total credits, so the sum of all the debits posted to the accounts must equal the sum of all the credits. Every time a transaction occurs, the elements in the equation change, but the basic equality of the two sides remains.

Question 3

Asset and expense accounts are increased and decreased on which side? What about liability and revenue accounts?

Answer 3

All asset and expense accounts are increased on the left (or debit side) and decreased on the right (or credit side).

Conversely, all liability and revenue accounts are increased on the right (or credit side) and decreased on the left (or debit side). Shareholder’s equity accounts, such as Common Shares, and Retained Earnings, are increased on the credit side, whereas Dividends is increased on the debit side.

Question 4

4. Financial statements: How do revenues, expenses, dividends and other comprehensive income affect shareholders’ equity on the balance sheet? (Note: we will look at partnerships and proprietorships later in the course so don’t worry about these concepts right now.)

Answer 4

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Question 5

5. The Accounting Cycle: What are the steps in the accounting cycle? (Note: including order and which ones are optional).

Answer 5

1. Identification and measurement of transactions and other events.
2. Journalizing: General journal, Cash receipts journal, Cash disbursements journal, Purchases journal, Sales journal, Other special journals
3. Posting: General ledger (usually monthly), Subsidiary ledgers (usually daily)
4. Trial balance preparation
5. Adjustments: Accruals, Prepayments, Estimated items
6. Adjusted trial balance
7. Statement preparation: Income statement, Retained earnings, Balance sheet, Cash flows
8. Closing (temporary accounts)
9. Post-closing trial balance (optional)
10. Reversing entries (optional)

When the steps have been completed, the sequence starts over again in the next accounting period. Statement preparation per Step 7 uses ASPE statement names (but it also applies under IFRS).

Question 6

6. Identifying and recording transactions and other events: What factors are considered in determining what is recorded in the accounting records?

An item should be recognized in the financial statements if?
What should be done before preparing a journal entry?

Answer 6

The first step in the accounting cycle is to analyze transactions and other selected events. The problem is determining what to record. There are no simple rules for whether an event should be recorded. It is generally agreed that changes in personnel, changes in managerial policies, and the value of human resources, though important, should not be recorded in the accounts. On the other hand, when the company makes a cash sale or purchase - no matter how small - it should be recorded.

An item should be recognized in the financial statements if it meets the definition of an element (such as a liability or asset), and is measurable. Where there is uncertainty about the future event occurring or not (such as the potential loss from a lawsuit), the entity must use all available information to make a neutral decision as to whether the liability/asset exists or not.

A transaction analysis should be done before a journal entry. The purpose of transaction analysis is first to identify the type of account involved and then to determine whether a debit or a credit to the account is required.

Question 7

6. Identifying and recording transactions and other events:

There are two types of events, what are they?
Many events have external and internal elements. Give an example. What other particular kind of external event is there?

Answer 7

External events and internal events.
>External events involve interaction between an entity and its environment, such as a transaction with another company, a change in the price of a product or service that a company buys or sells, or a flood or earthquake.
>Internal events occur within an entity, such as using buildings and machinery in its operations, or transferring or consuming raw materials in production processes.

Many events have external and internal elements. For example, acquiring the services of employees or others involves exchange transactions that are external events. The employee provides services and the pays the employee. Using those services (labour), is part of production, which is internal. Events may be initiated and controlled by an entity, such as the purchase of merchandise or the use of a machine, or they may be beyond its control, such as an interest rate change, a theft or vandalism, or a change in tax rates.

As a particular kind of external event, a transaction can be an exchange in which each entity both receives and gives up value, such as a purchase or sale of goods or services. Alternatively, a transaction can be a transfer in one direction in which an entity incurs a liability or transfers an asset to another entity without directly receiving value in exchange. (In other words, the transaction is non-reciprocal.) Examples include distributions to owners, the payment of taxes, gifts, charitable contributions, uninsured losses, and thefts.

Question 8

6. Identifying and recording transactions and other events:

Why are some events not recorded?

Answer 8

In short, most events that affect the enterprise’s financial position are recorded. Some events are not recorded because of tradition or because measuring them is too complex. The accounting profession in recent years has shown signs of breaking with age-old traditions and is more receptive than ever to measuring and reporting events and other items that were previously seen as too complex or immeasurable.

Question 9

7. What is the purpose of a journal and a ledger? What is a T account? Why are transactions and other selected events not first recorded in the ledger? Why is the journal is referred to as the book of original entry? What is the simplest journal form?

Answer 9

Ledger:
The effects of transactions on the basic business elements (assets, liabilities, and equities) are categorized and collected in accounts. The general ledger is a collection of all the asset, liability, shareholders’ equity, revenue, and expense accounts.

A T account is a convenient method for showing the effect of transactions on particular asset, liability, equity, revenue, and expense items.

Journal:
In practice, transactions and other selected events are not first recorded in the ledger. This is because each transaction affects two or more accounts, and since each account is on a different page in the ledger, it would be inconvenient to record each transaction this way. The risk of error would also be greater. To overcome this limitation and to have a complete record of each transaction or other selected event in one place, a journal (the book of original entry) is used.

Transactions are first recorded in chronological order (i.e., by date) in a journal and then transferred to the accounts. For this reason, the journal is referred to as the book of original entry.

The simplest journal form is a chronological listing of transactions and other events that expresses the transactions and events as debits and credits to particular accounts. This is called a general journal.

Question 10

7. Each journal entry has four parts. What are they? What are special journals?

Answer 10

1. The accounts and amounts to be debited (Dr.)
2. The accounts and amounts to be credited (Cr.)
3. A date.
4. An explanation.

Businesses use special journals in addition to the general journal. Special journals summarize transactions that have a common characteristic (such as cash receipts, sales, purchases, and cash payments), which saves time in doing the various bookkeeping tasks.

Question 11

8. What is journalizing and what is posting? Why do we need to do both of these?

Answer 11

Journalizing is the process of entering/recording all transactions data chronologically in a book called general journal or the book of original entry. Posting (part of the summarizing and classifying process) is when items entered in a general journal must be transferred to the general ledger.

~ We need to journalize first because it is more organized and results in the least of errors. Posting is done after to the general ledger which organizes all financial elements accounts in one place. ~

Question 12

What do the numbers in the Ref. column refer to in the general journal?

Answer 12

The numbers in the Ref. column of the general journal refer to the General Ledger accounts to which the items and its amount are posted.

Question 13

When is the general journal posting completed?

What two purposes does the number in the posting reference column serve?

Provide one example of a numbering system practice that business enterprises use?

Answer 13

The general journal posting is completed when all the posting reference numbers have been recorded opposite account titles in the journal.

(1) It indicates the ledger account number of the account involved, and (2) it indicates that the posting has been completed for the item.

Each business enterprise chooses its own numbering system for its ledger accounts. One practice is to begin numbering with asset accounts and to follow with liabilities, shareholders equity, revenue, and expense accounts, in that order.

Question 14

What is a trial balance and when is it prepared? How are the accounts ordered in a trial balance? What is the main purpose of a trial balance?

Answer 14

A trial balance is a list of general ledger accounts and their balances at a specific time. Customarily, a trial balance is prepared at the end of an accounting period.

The accounts are listed in the order in which they appear in the general ledger.

The main purpose of a trial balance is to prove the mathematical equality of debits and credits after posting. Under the double-entry system, this equality will occur when the sum of the debit account balances equals the sum of the credit account balances. A trial balance also uncovers errors in journalizing and posting. In addition, it is useful when preparing financial statements.

Question 15

The procedures for preparing a trial balance consists of?

Answer 15

1. Listing the account titles and their balances
2. Totalling the debit and credit column
3. proving the equality of the two columns.

Question 16

A trial balance does not prove that all transactions have been recorded or that the ledger is correct. Even though the totals in the trial balance columns agree, there can still be many errors. What are some examples that the trial balance may still balance in error?

Answer 16

When

1. a transaction is not journalized.
2. a correct journal entry is not posted.
3. a journal entry is posted twice
4. incorrect accounts are used in journalizing or posting, or
5. offsetting errors are made in recording a transaction amount.

In other words, as long as equal debits and credits are posted, even to the wrong account or in the wrong amount, the total debits will equal the total credits.

Question 17

9. Adjusting entries: What are adjusting entries and why are they necessary?

Answer 17

In order for revenues to be recorded in the period in which they are earned, and for expenses to be recognized in the period in which they are incurred, adjusting entries are made at the end of the accounting period. In short, adjustments are needed to ensure that the revenue recognition principle is followed and that proper matching occurs.

Question 18

Using adjusting entries makes it possible to?

Answer 18

The use of adjusting entries makes it possible to report on the statement of financial position the appropriate assets, liabilities, and owners’ equity at the statement date and to report on the statement of comprehensive income the proper net income (or loss) and comprehensive income for the period.

Question 19

Why does the trial balance not contain up-to-date and complete data?

Answer 19

The trial balance - the first pulling together of the transaction data - may not contain up-to-date and complete data because:

1. Some events are not journalized daily because it is not efficient to do so. Examples are the consumption of supplies and the earning of wages by employees.
2. Some costs are not journalized during the accounting period because these costs expire with the passage of time rather than as a result of recurring daily transactions. Examples of such costs are building and equipment deterioration, rent, and insurance.
3. Some items may be unrecorded. An example is a utility service bill that will not be received until the next accounting period.

Question 20

What is the starting point of adjusting entries and when is it prepared?

Answer 20

Adjusting entries are required every time financial statements are prepared. The starting point is to analyze each trial balance account to determine whether it is complete and up to date for financial statement purposes. The analysis requires a thorough understanding of the company’s operations and the relationships between its accounts. In accumulating the adjustment data, the company may need to take inventory counts of supplies and repair parts. It may also be desirable to prepare supporting schedules of insurance policies, rental agreements, and other contractual commitments. Adjustments are often prepared after the end of the period, but the entries are dated as at the statement of financial position date.

Question 21

What can adjusting entries be classified as?

Answer 21

Adjusting entries can be classified as prepayments, accruals, or estimated items (including fair value estimates).

Prepayments include:

1. Prepaid Expenses which are expenses paid in cash and recorded as assets before they are used or consumed.
2. Unearned Revenues which are revenues received in cash and recorded as liabilities before they are earned.

Accruals include:

3. Accrued Revenues which are revenues earned but not yet received in cash or recorded.
4. Accrued Expenses which are expenses incurred but not yet paid in cash or recorded.

Estimated Items:

5. Bad Debts are expenses for impaired accounts receivable estimated in the period the related revenue is earned.
6. Unrealized Holding Gain or Loss is a gain (or loss) on fair value - NI investments is estimated at the end of an accounting period and recorded as an increase (or decrease) to the investment account with a corresponding gain (or loss) in the Statement of Comprehensive Income.
7. Unrealized Holding Gain or Loss - OCI is a gain (or loss) on fair value- OCI investments estimated at the end of an accounting period and recorded as an increase (or decrease) to the investment account with a corresponding gain (or loss) in OCI on the Statement of Comprehensive Income.

Question 22

10. Adjusting entries for prepayments: What are prepaid expenses and what factors are considered in creating an adjusting entry for a prepayment?

Answer 22

Expenses that have been paid in cash and recorded as assets before they are used or consumed are identified as prepaid expenses. When a cost is incurred, an asset account is debited to show the service or benefit that will be received in the future. Prepayments often occur for such things as insurance, supplies, advertising, and rent.

Question 23

When do prepaid expenses expire? Does it require an entry each day with each expiration of these costs? Are assets overstated or understated before adjustment and what is the prepaid expense adjusting entry?

Answer 23

Prepaid expenses expire with the passage of time (such as rent and insurance) or by being used and consumed (such as supplies).

The expiration of these costs does not require an entry each day, which would be unnecessary and impractical. Instead, it is customary to postpone the recognition of such cost expirations until financial statements are prepared. At each statement date, adjusting entries are made to record the expenses that apply to the current accounting period and to show the remaining unexpired costs in the asset accounts.

Before adjustment, assets are overstated and expenses are understated. Thus, the prepaid expense adjusting entry results in a debit to an expense account and a credit to an asset account.

Question 24

What supplies are used in business and how is the account recorded when acquired? When is recognition for used-up supplies supposed to be?

Explain supplies in an adjusting entry.

Answer 24

Several different types of supplies are used in business. For example, a CA firm will have office supplies such as stationery, envelopes, and paper. In contrast, an advertising firm will have advertising supplies such as graph paper colour ink cartridges, and poster paper. Supplies are generally debited to an asset account when they are acquired.

During the course of operations, supplies are partly or entirely consumed. However, recognition of the used-up supplies is deferred until the adjustment process when a physical inventory (a count) of supplies is taken. The difference between the balance in the Supplies account (the asset) and the cost of supplies on hand represents the supplies used up for the period (the expense).

Question 25

What happens if the supplies account is not adjusted at the statement date?

Answer 25

If the adjusting entry is not made for supplies, expenses will be understated and net income overstated. Moreover, both assets and shareholder’s equity will be overstated on the statement of financial position.

Question 26

What kind of insurance do most companies have?

What happens if insurance is not adjusted?

Answer 26

Most companies have fire and theft insurance on inventory and equipment, personal liability insurance for accidents suffered by customers, and automobile insurance on company cars and trucks. The cost of insurance protection is the amount paid as insurance premiums. The term (duration) and coverage (what the company is insured against) are specified in the insurance policy. The minimum term is usually one year, but three-to five-year terms may be available and offer lower annual premiums. Insurance premiums are normally charged to the asset account Prepaid Insurance when they are paid. At the financial statement date, it is necessary to debit Insurance Expense and credit Prepaid Insurance for the cost that has expired during the period.

If adjustment is not made, expenses for that month will be understated by $A and net income overstated by $A. Moreover, both assets and owners’ equity also will be overstated by $A on the statement of financial position date.

Question 27

Depreciation/Amortization:
What kind of productive facilities typically own?
What is the term of service commonly referred to as?

Answer 27

Companies typically own a variety of productive facilities such as buildings, equipment and motor vehicles. These assets provide a service for many years.

The term of service is commonly referred to as the asset’s useful life. Because an asset such as a building is expected to provide service for many years, it is recorded as an asset, rather than an expense, in the year it is acquired. Such assets are recorded at cost, as required by the cost principle.

Question 28

Depreciation/Amortization:
In order to match the cost of the asset with the revenues that it is generating, what should be done? What is depreciation/amortization?
From an accounting standpoint, when productive facilities are acquired, the transaction is viewed as?

Answer 28

In order to match the cost of the asset with the revenues that it is generating, a portion of the cost of a long-lived asset should be reported as an expense during each period of the asset’s useful life. Depreciation/amortization is the process of allocating the cost of an asset to expense over its useful life in a rational and systematic manner.

From an accounting standpoint, when productive facilities are acquired, the transaction is viewed essentially as a long-term prepayment for services. Periodic adjusting entries for depreciation are therefore needed for the same reasons described earlier for other prepaid expenses. In other words, it is necessary to recognize the cost that has expired during the period (the expense) and to report the unexpired cost at the end of the period (the asset).

Question 29

Depreciation/Amortization:
In order to match the cost of the asset with the revenues that it is generating, what should be done? What is depreciation/amortization?

Answer 29

In order to match the cost of the asset with the revenues that it is generating, a portion of the cost of a long-lived asset should be reported as an expense during each period of the asset’s useful life. Depreciation/amortization is the process of allocating the cost of an asset to expense over its useful life in a rational and systematic manner.

Question 30

Depreciation/Amortization:

In determining a productive facility’s useful life, there are three main causes of depreciation. What are they?

Answer 30

1. Actual use
2. Deterioration due to the elements
3. Obsolescence

When an asset is acquired, the effects of these factors cannot be known with certainty, so they must instead be estimated. Thus, depreciation is an estimate rather than an exact measurement of the cost that has expired. A common procedure in calculating depreciation expense is to divide the asset’s cost by its useful life. For example, if the cost is $10,000 and the useful life is expected to be 10 years, annual depreciation is $1,000.

Question 31

Depreciation/Amortization:
What is book value/carrying cost? Are book value and market value the same? What happens if this adjusting entry is not made? What other depreciable assets and its related accumulated depreciation account names are there?

Answer 31

Book value or carrying cost is the difference between any depreciable asset’s cost and its related accumulated depreciation.

It is important to realize that the asset’s book value and market value are generally two different values.

Note also that depreciation expense identifies the portion of the asset’s cost that has expired in the month. As in the case of other prepaid adjustments, if this adjusting entry is not made, then total shareholders’ equity and net income will be overstated and the expense will be understated.

If additional equipment is involved, such as delivery or store equipment, or if the company has buildings, depreciation expense is recorded on each of these items. Related accumulated depreciation accounts also are created. These accumulated depreciation accounts would be described in the ledger as follows: Accumulated Depreciation - Trucks, Accumulated Depreciation - Office Equipment, and Accumulated Depreciation - Buildings.

Question 32

Unearned Revenues:
What are unearned revenues?
What are some items that result into unearned revenues? How do airlines like air Canada and WestJet treat receipts from sale of tickets? What’s the opposite of unearned revenues?

Answer 32

Unearned revenues are revenues that have been received in cash and recorded as liabilities before they are earned.

Items such as rent, magazine subscriptions, and customer deposits for further service may result in unearned revenues.

Airlines such as Air Canada and WestJet treat receipts from the sale of tickets as unearned revenue until the flight service is provided.

Tuition fees received by a university before the start of a semester are also considered unearned revenue. Unearned revenues are the opposite of prepaid expenses. Indeed, unearned revenue on the books of one company is likely to be a prepayment on the books of the company that has made the advance payment. For example, if identical accounting periods are assumed, a landlord will have unearned rent revenue when a tenant has prepaid rent.

Question 33

Unearned Revenues:

What should be credited when payment is received for services that will be provided in the future accounting period? How are unearned revenues earned and is it practical to make entries each day? What is the adjusting entries for unearned revenues?

Answer 33

When the payment is received for services that will be provided in the future accounting period, an unearned revenue account (a liability) should be credited to recognize the obligation that exists.

Unearned revenues are later earned by performing the service for the customer (which discharges the liability). During the accounting period, it may not be practical to make an entry each day as the revenue is earned. In such cases, the recognition of earned revenue is delayed until the adjustment process. At that time, an adjusting entry is then made to record the revenue that has been earned and to show the liability that remains. In the typical case, liabilities are overstated and revenues are understated prior to adjustment. Thus, the adjusting entry for unearned revenues results in a debit (decrease) to a liability account and a credit (increase) to a revenue account.

Question 34

Explain the adjusting entries for estimated items.

Answer 34

The third category of adjusting entries is estimated items. Adjusting entries for estimated items are required in order to record expenses, gains, and losses incurred in the current accounting period that have not been recognized through daily entries. If an estimated adjustment is needed for anticipated bad debts, the expense account is understated. So, the adjusting entry will typically increase both a contra account on the statement of financial position and an income statement account. Similarly, an adjusting entry for an unrealized gain would increase an investment account and affect unrealized gains on the statement of comprehensive income.

Question 35

15. Explain the adjusting entry for bad debt expense and the impact of the adjustment on the balance sheet and income statement.

How do you properly match revenues with expenses? How are bad debts estimated? How is the Allowance for Doubtful Accounts calculated?

Answer 35

In order to properly match revenues with expenses, an estimate of bad debts must be recorded as an expense of the period in which the revenue was earned instead of being recorded in the period when the accounts or notes are written off. So that the receivable balance shows its proper value, estimated uncollectible receivables must be recognized. Proper matching and valuation therefore require an adjusting entry.

At the end of each period, an estimate is made of the amount of current period revenue on account that will later be uncollectible. The estimate is based on the amount of bad debts experienced in past years, general economic conditions, how long the receivables are past due, and other factors that indicate the likelihood of collection. Often the estimate is expressed as a percentage of revenue each month, followed by a detailed analysis at the end of the fiscal year.

Allowance for Doubtful accounts may be calculated by applying different percentages to the aged trade accounts receivable and trade notes receivable balances at the end of the period.

Question 36

How do you properly match revenues with expenses? How are bad debts estimated? How is the Allowance for Doubtful Accounts calculated?

Answer 36

In order to properly match revenues with expenses, an estimate of bad debts must be recorded as an expense of the period in which the revenue was earned instead of being recorded in the period when the accounts or notes are written off. So that the receivable balance shows its proper value, estimated uncollectible receivables must be recognized. Proper matching and valuation therefore require an adjusting entry.

At the end of each period, an estimate is made of the amount of current period revenue on account that will later be uncollectible. The estimate is based on the amount of bad debts experienced in past years, general economic conditions, how long the receivables are past due, and other factors that indicate the likelihood of collection. Often the estimate is expressed as a percentage of revenue each month, followed by a detailed analysis at the end of the fiscal year.

Allowance for Doubtful accounts may be calculated by applying different percentages to the aged trade accounts receivable and trade notes receivable balances at the end of the period.

Question 37

UNREALIZED HOLDING GAINS OR LOSSES (NI AND OCI):

In order to adjust to fair value for certain categories of investments, what needs to be done?

Answer 37

In order to adjust to fair value for certain categories of investments, an unrealized gain or loss must be recorded in the statement of comprehensive income at the end of the reporting period.

Question 38

What is the accounting information systems?

Accounting information systems can be very different from one business to another. Provide examples of factors that shape these systems?

Answer 38

The system of collecting and processing transaction data to make financial information available to interested parties is known as the accounting information system.

Many factors shape these systems, including the type of business and the kinds of transactions it engages in, the firm’s size, the amount of data handled, and the kind of information that management and others need to get from the system.

Question 39

What is an event?

Answer 39

Something of consequence that happens. And event generally is the source or cause of changes in assets, liabilities and equity. Events can be external or internal.

Question 40

What is a transaction?

Answer 40

An external event involving a transfer or exchange between two or more entities or parties.

Question 41

What is an account?

Answer 41

A systematic arrangement that accumulates transactions and other events. A separate account is kept for each asset, liability, revenue, and expense, and for gains, losses, and capital (owner’s equity).

Question 42

What is permanent and temporary accounts?

Answer 42

Permanent (real) accounts are assets, liabilities, and equity accounts; they appear on the statement of financial position.
Temporary (nominal) accounts are revenue, expenses, and dividend accounts; except for Dividence, they appear on the theme of comprehensive income. Temporary accounts are closed at the end of each fiscal year; Permanent accounts are left open.

Question 43

What is a ledger?

Answer 43

The book or electronic database containing the accounts. Each account usually has a separate page. The general ledger is a collection of all the assets, liabilities, owner’s equity, revenue, and expense accounts. A subsidiary ledger contains the details of a specific general ledger account.

Question 44

What is a journal?

Answer 44

The book of original entry were transactions and other selected events our first recorded. Various amounts are transferred to the ledger from the book of original entry, journal.

Question 45

What is posting?

Answer 45

The process of transferring the essential facts and figures from the book of original entry, to the ledger accounts.

Question 46

What is trial balance?

Answer 46

A list of all open accounts in the ledger and their balances. A trial balance that is taken immediately after all adjustments have been posted is called an adjusted trial balance. A trial balance taken immediately after closing entries have been posted is known as a post – closing or after-closing trial balance. A trial balance can be prepared at any time.

Question 47

What is adjusting entries?

Answer 47

Entries that are made at the end of an accounting period To bring all accounts up-to-date on an accrual accounting basis so that correct financial statements can be prepared.

Question 48

What are financial statements?

How many financial statements are involved and what do they measure?

Answer 48

Statements that reflect the collecting, tabulating, and final summarizing of the accounting data. Four financial statements are involved: (1) The statement of financial position (or balance sheet under ASPE), which shows the enterprise’s financial condition at the end of a period; (2) The statement of comprehensive income (or income statement under ASPE), which measures the results of operations during the period; (3) The statement of Cash flows, which reports the cash provided and used by operating, investing, and financing activities during the period; and (4) The statement of changes in shareholder’s equity ( or statement of retained earnings under ASPE),which reconciles the balance of the retained earnings and other equity accounts from the beginning to the end of the period.

Question 49

What are closing entries?

Answer 49

The formal process for reducing temporary accounts to zero and then determining net income or net loss and transferring it to an owner’s equity account.

Question 50

What are reversing entries?

Answer 50

Entries made to reverse some of the adjusting entries prior to recording the next period’s transactions. These entries are optional.