Chapter 4 Flashcards
Temporary Accounts
Relate to one accounting period; closed at period-end
Include: Revenues, Expenses, Owner Withdrawals, Income Summary
Permanent Accounts
Report on activities related to one or more future accounting periods; not closed at period-end
Include: Assets, Liabilities, Owner Capital
Closing Process
Occurs at the end of an accounting period after financial statements are completed
1. Identify accounts for closing
2. Record and post the closing entries
3. Prepare a post-closing trial balance
Income Summary
Temporary account used only in the closing process to which the balances of revenue and expense accounts are transferred; its balance is transferred to the capital account (or retained earnings for a corporation).
Closing Entries
Transfer the end-of-period balances in revenue. expense, and withdrawals accounts to the permanent capital account. Necessary because:
- Revenue, expense, and withdrawals accounts must begin each period with zero balances
Owner’s capital must reflect prior periods’ revenues, expenses, and withdrawals
Post-Closing Trial Balance
A list of permanent accounts and their balances after all closing entries. Only balance sheet (permanent) accounts are on a post-closing trial balance.
Verifies that (1) total debits equal total credits for permanent accounts and (2) all temporary accounts have zero balances.
Accounting Cycle
The steps in preparing financial statements
1. Analyze Transactions
2. Journalize
3. Post
4. Prepare Unadjusted Trial Balance
5. Adjust and Post Accounts
6. Prepare Adjusted Trial Balance
7. Prepare Financial Statements
8. Close Accounts
9. Prepare Post-Closing Trial Balance
Operating Cycle
The time span from when cash is used to acquire goods and services until cash is received from the sale of goods and services; most operating cycles are less than one year
Current Assets
Assets that are expected to be sold, collected, or used within one year or the company’s operating cycle, whichever is longer
Ex: cash, short-term investments, accounts receivable, short-term notes receivable, merchandise, inventory, prepaid expenses
Long-Term Investments
Investments expected to be held longer than one year (or one operating cycle)
Ex: stocks, bonds, notes
Plant Assets
Tangible assets that are both long-lived and used to produce or sell products and services
Ex: equipment, machinery, buildings, land
Also called Property, Plant and Equipment (PP&E) or fixed assets
Intangible Assets
Long-term assets that benefit business operations but lack physical form; value derives from privileges or rights granted to or held by the owner
Ex: patents, trademarks, copyrights, franchises, goodwill
Current Liabilities
Liabilities due to be paid or settled within one year (or the operating cycle, whichever is longer)
Ex: accounts payable, wages payable, taxes payable, interest payable, unearned revenues
Long-Term Liability
Liabilities not due within one year
Ex: notes payable, mortgages payable, bonds payable, lease obligations
Equity
The owner’s claim on assets
Current Ratio
A measure of a company’s ability to pay its short-term obligations
