Lecture 8 Flashcards
What is the purpose of closing entries?
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
Why are income, expenses and distributions closed off each period?
Theyre temporary accounts which start off at 0 each period
What is the accounting process?
- 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
What is a trial balance?
A listing of balances on all nominal ledger accounts
What are the 2 types of trial balances?
Pre-adjustment & post adjustment trial balance
What is the purpose of adjusting entries?
To ensure that the statement of profit & loss reports income earned, and expenses incurred during the period
What is the procedure of closing the accounts?
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
How is drawings transferred to the owners capital account?
Directly
Credited and balanced off to the balance sheet
What happens to sales & cost of sales at the end of the period?
They’re closed off to the trading account
Sales account will be debited
Cost of sales will be credited
What does the balance in the trading account represent?
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
When income exceeds expenses, the profit or loss account will have a …. Balance
Credit
Representing a profit for the period
When expenses exceed income, the profit or loss account will have a … balance
Debit
Representing a net loss for the period
What happens to the balance of the profit & loss account?
It’s closed off to the owner’s capital account or retained earnings (both equity accounts)
What type of account is the distributions account?
Debit account with a debit balance
How do you close off the distributions account?
Zero it by crediting it
Debit it to the owner’s capital account