Chapter 4: Completing the Accounting Cycle Flashcards
Accounting Cycle
The process to produce financial statements for a period. 1) Analyze business transactions 2) Journalize transactions 3) Post to ledger accounts 4) Prepare Trial Balance 4.5) Prepare Worksheet (optional) 5) Journalize and post adjusting entries 6) Prepare an adjusted Trial Balance 7) Prepare Financial Statements 8) Journalize and post closing entries 9) Prepare post closing Trial Banace then back to one! (1-3 happen during the period, 4-9 at the end of the period)
Closing Process
At the end of a period, jounalizing and posting the closing entries to set the balance of temporary accounts (revenues, expenses, income summary and dividends) to zero.
Liquidity
Ability to pay obligations expected due in the next year
Operating Cycle
Average time from purchase of inventory to collection of cash from customers
Current Assets
Assets that the company expects to convert to cash or use up within one year (or one operating cycle - whichever is longer).
Generally listed on balance sheet in the order assets are expected to be converted to cash.
Cash Short Term Investments Accounts Receivable Inventory Prepaid Expenses
Long Term Assets
Long term investments (over 1 year holding) such as:
- stocks and bonds
- Property, plant and Equiptment
- land or buildings NOT being used in operating activities
- Intangible assets
Current Liabilities
Obligation to pay in one year/ one operating cycle (whichever is less)
usually:
1) Notes Payable
2) Accounts Payable
3) Other current liabilities in order of magnitude most to least. Including long term liabilities/ portions of long term liabilities that are coming due within the operating cycle.
Long Term Liabilities
Obligations the company expects to pay after a year
Liabilities or portions of long term liabilities that are due within the year are moved to current.
Temporary vs Permanent Accounts
Temporary (aka “nominal”): accounts that are closed at the end of the fiscal year - these account relate to a specific accounting period.
- Revenue and Expense accounts
- Owner’s Drawing Accounts
Permanent (aka “real”): accounts that are not closed at the end of the fiscal year.
- Asset and Liability Accounts
- Owner’s Capital/ Stock accounts
Correcting Entries
Must be posted BEFORE the closing entries
Alternate option to reverse the incorrect entry and then post the correct entry
Closing Entries
Fiscal year-end adjusting journal entries that formally recognize net income (or loss) and drawings to owner’s capital or retained earnings.
Closing the Books (Revenue and Expenses)
Debit Revenue account to $0
Credit Income Summary
Debit Income Summary
Credit Expense Accounts to $0.00
If net gain (normal balance Credit side)
Debit Income Summary to $0.00
Credit Owner’s Capital
if net loss (balance Debit Side)
Debit Owner’s Capital
Credit Income Summary to $0.00
(Computer’s simplify this process)
Closing the Books (Owner’s Drawing)
Debit Owner’s Capital (or retained earnings)
Credit Owner’s Drawing to $0.00
(Computer’s simplify this process)
Income Summary
Account used to close out expenses and revenue at the end of the accounting period
Debit Decrease | Credit Increase
Credit Normal Balance
Reversing Entry
Switches the debit and credit of a previous entry to make the next period’s accounting easier
(review this further)
