Closing Entries Flashcards
Business Entity Principle
the owner must separate their business and personal assets
Cost Principle
assets must be listed on the balance sheet at their purchase price
Time-Period Principle
the time period must be consistent
Matching Principle
expenses must be recorded in the period in which they helped to earn revenue
Objectivity Principle
there must be a source document (evidence) that a transaction has occurred
Principle of Materiality
any information that could impact the decision of a person looking at the financial statements should be included on the statements
Principle of Conservatism
requires that accountants use caution and show the least favourable bottom line in situations where there are two possible option
Current Asset (100s)
assets that will be converted into cash or used up within the year
Fixed Asset (100s)
assets that last longer than a year
Current Liability (200s)
debt that is due within the year
Long-term Liability (200s)
debt that is due more than one year from the borrowing date
Owner’s Equity (300s)
includes the owner’s capital account and the owner’s drawings accounts which records the owner’s withdrawals from the business
Revenue (400s)
account which records business income
Expense (500s)
items that are used in the operation of a the business
Contra-asset (100s)
an account that reduces the balance in an asset account (accumlated depreciation)
Capital cost allowance
the depreciation rate allowed by the Canadian government
Undepreciated cost of an asset
usually the book value at the beginning of the year
Accounts that close at the end of the year
temporary accounts which include: revenue, expense and drawings accounts
Accounts that do not close at the end of the year
permanent accounts which include assets, liabilities and the owner’s capital account
Accumulated depreciation
the total amount of depreciation expense that has been recorded thus far in the life of the asset
What are the steps of the accounting cycle?
Receive source documents, journalize entries, post to the ledger, create a worksheet (on the worksheet you will make adjustments), from the worksheet you can create the financial statements and then journalize the adjusting and closing entries, post those adjustments and closing entries to the ledger and create a post-closing trial balance
What is the purpose of adjusting and closing entries?
Adjusting entries are made to ensure that account balances are accurate and up-to-date.
Closing entries are used to update the owner’s capital account with any net income or net loss for the period and to ensure that temporary accounts are reset to zero so they are ready to begin the next accounting period.
What is Income Summary?
A captial account that is on the credit side.
Income summary is an account that recieves all blaances form temporary accounts (not drawings). Only lasts 3 transactions
What are Temporary Accounts?
Will have to be closed by the end of the accounting period so we can start with a $0 balance (revenue, expense and drawings). Also to update the NL/NP and drawings to the captial account
What are Pernament Account?
No need to be closed (assets)
What is Closing the Books?
the process used to reduce revenue, expense and drawings
accounts to zero at the end of the period and update the owner’s capital account with what has occurred within the period
