Lecture 8 Flashcards

1
Q

What is the purpose of closing entries?

A

Closing entries serve the purpose of transferring the end of period balances in the income and expense accounts to the capital account so the capital/equity account represents the owners equity after adjusting for profit in the period

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2
Q

Why are income, expenses and distributions closed off each period?

A

Theyre temporary accounts which start off at 0 each period

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3
Q

What is the accounting process?

A
  • analyse transactions to determine economic impact on the accounting equation (debit/credit)
  • record external transactions in the journal
  • transfer to the ledger
  • prepare pre-adjustment trial balance
  • process adjusting entries
  • prepare post-adjustment trial balance
  • prepare financial statements
  • process closing entries
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4
Q

What is a trial balance?

A

A listing of balances on all nominal ledger accounts

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5
Q

What are the 2 types of trial balances?

A

Pre-adjustment & post adjustment trial balance

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6
Q

What is the purpose of adjusting entries?

A

To ensure that the statement of profit & loss reports income earned, and expenses incurred during the period

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7
Q

What is the procedure of closing the accounts?

A

Income & expenses balances are transferred to temporary “trading account” and “profit or loss account”

Then it’s transferred to the owners equity account on the balance sheet

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8
Q

How is drawings transferred to the owners capital account?

A

Directly

Credited and balanced off to the balance sheet

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9
Q

What happens to sales & cost of sales at the end of the period?

A

They’re closed off to the trading account

Sales account will be debited

Cost of sales will be credited

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10
Q

What does the balance in the trading account represent?

A

Gross profit

The gross profit is then transferred to the profit & loss account

Debit trading account, credit profit & loss to give it an opening credit balance to represent income balance

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11
Q

When income exceeds expenses, the profit or loss account will have a …. Balance

A

Credit

Representing a profit for the period

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12
Q

When expenses exceed income, the profit or loss account will have a … balance

A

Debit

Representing a net loss for the period

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13
Q

What happens to the balance of the profit & loss account?

A

It’s closed off to the owner’s capital account or retained earnings (both equity accounts)

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14
Q

What type of account is the distributions account?

A

Debit account with a debit balance

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15
Q

How do you close off the distributions account?

A

Zero it by crediting it
Debit it to the owner’s capital account

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