Chapter 4: Completion of the Accounting Cycle Flashcards
What accounts are closed at the end of the accounting period?
Revenues, Expenses, Withdrawals/Drawings, and Income Summary. These are called TEMPORARY accounts.
When are the temporary accounts closed?
Temporary accounts are closed after the financial statements are prepared and the company has reported it’s profits/losses for the year.
Explain the process to close revenue accounts.
Revenue accounts are closed by DEBITING the Revenue accounts and CREDITING the Income Summary Account.
Explain the process to close expense accounts.
Expense accounts are closed by CREDITING the Expense accounts and DEBITING the Income Summary account.
Explain the process to close the Income Summary account.
The balance in the income summary account (after closing revenue and expenses) is then closed to the Owner’s Capital account. This amount should equal the company’s profit/loss. If profit, credit Owner’s Capital, if loss, debit Owner’s Capital.
Explain the process to close the Withdrawals/Drawing account.
After the Income Summary account is closed to the Owner’s Capital, DEBIT Owner’s Capital and CREDIT the Drawings account.
After closing all temporary accounts, what is the balance in the temporary accounts?
$0
Why do we complete the closing process to close the temporary accounts?
Closing the temporary accounts transfers the company’s profits/loss and any personal drawings to the Owner’s Capital account for the full accounting period, so the company can begin it’s business activities afresh for another year.
What accounts appear in the POST CLOSING TRIAL BALANCE?
Only balance sheet accounts (permanent accounts) would appear in this Trial Balance.
What accounts appear in the POST CLOSING TRIAL BALANCE?
Only balance sheet accounts (permanent accounts) would appear in this Trial Balance.
What is the difference between a Balance Sheet and a Classified Balance sheet?
A classified balance sheet breaks down the assets and liabilities into a number of categories/classifications.
What categories are the assets broken down into on the Classified Balance sheet?
Current Assets, Long-Term Investments, Property Plant, & Equipment, Intangible Assets, Goodwill
What categories are Liabilities broken down into on the Classified Balance Sheet?
Current Liabilities, Non-Current Liabilities
What is a current asset and give two examples.
Assets that will be used up within a year. Examples: Cash, Petty Cash, Accounts Receivable, Prepaids, Temporary Investments, Supplies, Inventory
What is a long term investment?
Longer than one year, will no be converted into cash within a year
What is Property Plant & Equipment
Physical assets that are NOT acquired for resale, but are to be used in the business.
Is Land a depreciable asset?
NO
Is Buildings a depreciable asset?
YES
Are furniture and equipment depreciable assets?
YES
What is an intangible asset?
Non-physical assets such as patents, copyrights, franchises.
What is goodwill?
Occurs when a company aquires another business at a price higher than the acquired business’s net assets.
What is a current liability and give two examples?
Must be paid within one year or less. Examples: Accounts Payable, Salaries Payable, Unearned Revenue, Short Term Notes Payable, current portion of Long-Term debit.
What is non-current liabilities?
Longer than one year. Examples: non-current portion of long term debt, non-current portion of long term notes payable, non-current portion of mortgage payable.
How do you calculate the Working Capital Ratio and what is the benefit of this information?
Current Assets - Current Liabilities = Working Capital Ratio. When current assets are greater than current liabilities, the company will be able to pay it’s current liabilities.
How do you calculate the Current Ratio and what is the benefit of this information?
Current Assets / Current Liabilities = Current Ratio. This shows whether a company can pay it’s current liabilities.
