Chapter 4: Completion of the Accounting Cycle Flashcards
What is closing the accounts?
Closing the accounts involves bringing the balances in all revenue, expense, and drawings accounts to zero, and updating the balance in the Owner’s Equity account
What are temporary accounts?
The accounts that relate to only one accounting period whose balances are transferred to Owner’s Capital at the end of an accounting period
e.g. revenue, expenses, and drawings accounts
What are permanent accounts?
The accounts that relate to one or more accounting periods
e.g. balance sheet accounts
What are closing entries?
Entries made at the end of an accounting period to transfer the balances of temporary accounts to the owner’s equity account
What is a post-closing trial balance?
The post-closing trial balance lists permanent accounts and their balances after closing entries have been journalized and posted
What is the purpose of the post-closing trial balance?
The purpose of the post-closing trial balance is to prove the equity of the permanent account balances that are carried forward into the next accounting period
What accounts do the post-closing trial balance contain?
Permanent balance sheet accounts only
What does the classified balance sheet help users determine?
1) Whether the company has enough assets to pay its debts as they come due
2) The claims of short and long-term creditors on total assets
What order does the classified balance sheet lists their assets in ?
Classified balance sheets lists assets in order of their relative liquidity
What is liquidity ?
How quickly an item can be converted to cash
Why are users of financial statements interested in liquidity?
Users of financial statements are interested in liquidity because business difficulties often arise from a shortage of cash
What liabilities create the greatest strain on cash?
Liabilities that must be paid the soonest create the greatest strain on cash
In what order does the classified balance sheet lists its liabilities?
The classified balance sheet lists liabilities in order they are due to be paid
What are current assets?
Cash and other assets that will be converted to cash, sold, or used up within one year in an accounting period
What are long-term assets?
Assets not classified as current. More than a year long.
What are intangible assets?
Long-loved assets that do not have physical substance. They derive its value from the rights and privileges it provides the owners
What is goodwill?
Goodwill results from the acquisition of another company when the price paid for the company is higher than the fair value of the purchased company’s net assets
What are current liabilities?
Debts to be paid in cash or with goods or services within one year
What are long term liabilities?
Liabilities which are not current. More than one year.
What is working capital?
The difference between current assets and current liabilities. It shows a company’s ability to pay it short-term debts
What is current ratio?
A measure of short-term debt-paying ability that is determined by dividing current asset by current liabilities
What is acid-test ratio?
A measure of the company’s immediate short-term liquidity that is determined by adding cash, short-term investments and receivables and dividing it by current liabilities
