Completing the Accounting Cycle

Question 1

How do we calculate retained earnings?

Answer 1

Past profits (previous retained earnings) + profit - drawings/dividends

Question 2

What do closing entries do to temporary accounts?

Answer 2

Produce a zero balance

Question 3

What are temporary accounts?

Answer 3

Revenue, expenses, dividends

Question 4

What are the four steps of the closing process?

Answer 4

1. Close all Income accounts to Profit or Loss Summary
2. Close all Expenses accounts to Profit or Loss Summary
3. Close Profit or Loss Summary to Retained Earnings
4. Close Owner’s Drawings to Retained Earnings

Question 5

What is the purpose of reversing entries and when are they done?

Answer 5

To simplify the recording of transactions in the following accounting period, done at the commencement of the next period

Question 6

What types of BDAs are reversed?

Answer 6

Prepaid revenue (recorded as revenue), prepaid expense (recorded as expense), accrued revenue and accrued expense

Question 7

DO NOT FORGET TO FREAKING CLOSE OUT THE DRAWINGS ACCOUNT

Answer 7

DO NOT FORGET TO FREAKING CLOSE OUT THE DRAWINGS ACCOUNT

Question 8

What is a reporting entity?

Answer 8

SAC1 defines a reporting entity as any entity in which it is reasonable to assume exists dependent users who need financial statements for information to make economic decisions.

Question 9

What is a dependent user?

Answer 9

A dependent user is a user of whom needs accounting information but does not have the power to obtain it.

Question 10

When do we conclude that an entity is a reporting entity?

Answer 10

WHEN THERE ARE USERS OF WHOM NEED ACCOUNTING INFORMATION BUT DO NOT HAVE ACCESS TO IT.