Topic 5: Preparing Accounting Reports & Completing the Accounting Cycle

Question 1

What are the 7 columns in the Worksheet?

Answer 1

1. Account Title (e.g., Cash at Bank)
2. Account Number (e.g., 101)
3. Unadjusted Trial Balance
4. Adjustments
5. Adjusted Trial Balance
6. Income Statement
7. Balance Sheet

Question 2

When can adjusting entries be done?

Answer 2

At the end of the month, quarter, half-year, or whenever management decides.

Question 3

When can closing entries be done?

Answer 3

Can only be done at the end of the financial year.

Question 4

What does it mean to adjust entries?

Answer 4

The ‘Matching Concept’ is used whereby revenues for a period are ‘matched’ with the expenses incurred in earning that revenue for the period. Adjusting entries are used at the end of a period to help achieve this matching of revenues with expenses.

Question 5

What is the Income Summary account?

Answer 5

The Income Summary account is a temporary account created to facilitate closing the revenue and expense accounts. Once its task is complete this account is also closed.

Question 6

What are the four steps to completing closing entries?

Answer 6

1. Empty all Revenue accounts into the Income Summary (Dr Revenue, Cr Income Summary)
2. Empty all Expense accounts into the Income Summary (Dr Income Summary, Cr Expenses)
3. Empty the balance of the Income Summary into the Capital Accounts. Dr the credit balance (profit), Cr the Capital Account. If the Income summary has a debit balance (net loss) Cr Income Summary, Dr Capital Account.
4. Transfer any Capital Introduced and Drawings into the Capital Account.

Question 7

What is the Debt Ratio?

Answer 7

Debt Ratio = Total Liabilities / Total Assets
It indicates the proportion of a business’s assets that are financed with debt and should be less than 1.

Question 8

What is the Current Ratio?

Answer 8

Current Ratio = Current Assets / Current Liabilities
Measures the ability of a business to pay its current liabilities with its current assets. A ratio less than 1 indicates liquidity issues.

Question 9

What is the ‘Complete Accounting Cycle’?

Answer 9

1. Record transactions in a Journal
2. Post to the Ledger
3. Prepare Unadjusted Trial Balance
4. Journalise and post Adjustments
5. Prepare Adjusted Trial Balance
6. Prepare Financial Statements
7. Perform Closing Entries
8. Prepare Post Closing Trial Balance