chapter 5

Question 1

Closing temporary accounts

Answer 1

• Must close income and expense accounts

- Profit or Loss Summary account used to summarise balances and calculate profit

Question 2

Closing entries:

Answer 2

journal entires made at the end of an accounting period to reduce income, expense and drawings accounts to a zero balance and transfer the net balance to the capital account in a sole trader or partnership business or to a retained earnings account in the case of a company

Question 3

The Closing Process

Answer 3

1. The balance in each income account is transferred to the Profit or Loss Summary account
2. The balance in each expense account is transferred to the Profit or Loss Summary account
3. The balance in the Profit or Loss Summary account is transferred to the Capital account
4. The Drawings account is transferred to the Capital account

Question 4

Recording adjusting entries

Answer 4

Entries dated last day of accounting period

• Data for determining entity’s closing entries for the period are found in income statement columns of worksheet
  which contain temporary income and expense accounts

Question 5

The post-closing trial balance

Answer 5

Prepare post-closing trial balance to verify the equality of debits and credits in the general ledger - Confirm that ledger is ‘in balance’
- Confirms that only permanent accounts have balances - Starting point for next accounting period

Question 6

Accrual entries in subsequent periods

Answer 6

• Adjusting entries made at the end of period to record accruals
• Cash received or paid in subsequent period for accruals must be analysed to correctly apportion amount between
  two periods (e.g. payment for salaries)

Question 7

Accounting for a partnership

Answer 7

• Similar in most respects to accounting for a sole trader
• Separate capital and drawings accounts for each partner
• Profit/loss at the end of the period is allocated to each partner in accordance with the partnership agreement
• Each drawings account is closed off to the partner’s capital account

Question 8

Accounting for a company

Answer 8

Company is a separate legal entity

• Owners referred to as shareholders
• Owner’s interests are called share capital
• Not all profits/losses are distributed to shareholders, may be retained/accumulated
• Share capital represents retained profits (or accumulated losses) + share of assets