Chapter 5: Completing the accounting cycle

Question 1

The closing process

Answer 1

1. Income accounts closed to P or L summary – Debit income
   – Credit P or L summary
2. Expense accounts closed to P or L summary – Debit P or L summary
   – Credit expense
3. Profit or Loss Summary balances to determine profit/loss then closed to capital
   – Debit P or L summary (assuming a profit) – Credit capital account
4. Drawings closed to capital – Debit capital account
   – Credit drawings account

Question 2

Reversing entries

Answer 2

• Not required for all adjusting entries
• Only used where adjustment is temporary
– Accrued expenses
– Accrued income
– Prepayments originally recorded as expenses
– Unearned income originally recorded as income

Question 3

Accounting for a partnership

Answer 3

• 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 4

Accounting for a company

Answer 4

• Owners are referred to as shareholders
• Owners’ 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