Accounting Chapter 3: The Closing Process

The entries that transfer the balances of all temporary accounts to retained earnings are referred to as

closing entries

Preparing a(n) ___ - ___ trial balance is the last step in the accounting cycle and occurs after all accounts have been updated with closing journal entries. (Enter one word per blank.)

post closing

During the closing process, the closing entries to individual expense accounts will be recorded with a ______ journal entry in order to reduce the account balance to zero.

credit Wrong: debit - Reason: Since expenses increase with debit entries and therefore, maintain normal debit balances, the accounts must be credited to reduce the balance to zero.

A closing entry includes a ______.

debit to sales revenue Wrong: credit to Accounts Receivable, credit to Cash - Reason: Assets and liabilities are not closed at the end of the period. debit to Interest Expense - Reason: Expenses are closed with a credit entry since they normally carry a debit balance.

During the closing process, the closing entry to reduce the sales revenue normal account balance to zero requires the revenue account be ___.

debited

During the year, a company had $100,000 in revenues, $40,000 in expenses, and paid $3,000 in dividends. These items caused retained earnings to:

increase by 57,000 100,000 - 40,000 -3000 = 57000 Reason: Revenues increase while expenses and dividends decrease retained earnings. $100,000-40,000-3,000=$57,000

Closing entries move the balances from the ______ accounts into the Retained Earnings account.

temporary

The ending balance of retained earnings represents ______.

the cumulative total of net income less dividends over the life of the company.

Temporary accounts are found in:

the income statement Reason: Temporary accounts include revenues and expenses, which are found in the income statement, and dividends, which are found in the statement of stockholders equity.

Wald Corporation's adjusted trial balance shows the following temporary accounts: service revenue: $20,000; salaries expense $8,000; insurance expense: $2,000; utilities expense: $3,000; interest expense $200; and depreciation expense: $1,400. As part of the the closing process, Wald should credit retained earnings for:

$20,000 - Reason: retained earnings is credited for the balance of revenue Wrong: $14,600, $5,400 Reason: the balance of revenue

X Company began the month with $500 in retained earnings. During the month, X Company had revenues of $800, expenses of $600 and dividends of $50. Retained earnings at the end of the month equals

650

Which of the following are characteristics of all balance sheet accounts?

Balances are carried forward from period to period Accounts are referred to as permanent

The closing entry for expense accounts involves the following journal entry.

Debit - Retained earnings Credit - Expenses

As part of the closing process, dividends are closed to retained earnings. In the closing entry, correctly match the accounts with the appropriate debit/credit.

Debit: Retained earnings Credit: Dividends

True or false: Since Retained Earnings is involved in the closing process, it is classified as a temporary account.

False Reason: Although Retained Earnings is involved in the closing process, it is a permanent, not a temporary, account.

At the beginning of the accounting period, the balances of temporary accounts

are zero

Which of the following would be included (added or subtracted) in the calculation of retained earnings? (Select all that apply.)

beginning balance retained earnings revenues dividends declared expenses

The _________ represents the cumulative total of net income less dividends over the life of the company.

ending balance of retained earnings

In the closing process, ______ are zeroed out by crediting each account and ______ are zeroed out by debiting each account.

expenses and dividends; revenues

During the year, a company had $100,000 in revenues, $40,000 in expenses, and paid $3,000 in dividends. The net of these items caused total stockholders' equity to ______.

increase by $57,000 Reason: Revenues increase, while expenses and dividends decrease stockholders' equity.

All balance sheet accounts are ___ accounts, meaning the balances are carried forward from one period to the next.

permanent

The closing entry for dividends involves a debit to Retained Earnings and a credit to Dividends Declared. The debit to Retained Earnings causes a(n) ___ in the balance of the account.

reduces

The journal entry to close dividends _____ retained earnings.

reduces

Temporary accounts include ______, ______, and ______.

revenues expenses dividends Wrong: cash - Reason: Cash is a permanent account thus its account balance is not reduced to zero at the close of each period. Prior period's ending cash balance becomes the current period's beginning cash balances. Temporary accounts are revenues, expenses and dividends declared which are closed to retained earnings at the end of the period to reduce their balances to zero.

The post-closing trial balance helps to verify that: (Select all that apply.)

we prepared and posted closing entries correctly the accounts are ready for next period's transactions

Identify the entries needed for the closing process.

Credit Dividends Declared and debit Retained Earnings. Debit each revenue, credit each expense, and record the difference in Retained Earnings. Wrong: Debit Dividends Declared and credit Retained Earnings. - Reason: Dividends Declared has a normal debit balance, so the account should receive a credit in order to be reduced to zero. By recording Retained Earnings with a debit, this account is reduced by the amount of the dividends. Credit each revenue, debit each expense, and record the difference in Retained Earnings. - Reason: Revenues should be debited and expenses should be credited in order to reduce the accounts to zero.

Klein Corporation's retained earnings account showed a balance of $200 at 1/1/18. During the year, the company earned revenues of $5,000 and incurred expenses of $3,000. Dividends declared were $500. The amount of retained earnings reported on the 12/31/18 balance sheet will be

$1,700 Reason: $200+$5,000-$3,000-$500

Wald Corporation's adjusted trial balance shows the following temporary accounts: service revenue: $20,000; salaries expense $8,000; insurance expense: $2,000; utilities expense: $3,000; interest expense $200; and depreciation expense: $1,400. As part of the the closing process, Wald should debit retained earnings for:

$14,600 - Reason: retained earnings is debited for the sum of expenses Wrong: $5,400 - Reason: debit for the sum of expenses $20,000 - Reason: debit for the sum of expenses

Which of the following are results of closing entries? (Select all that apply.)

Retained earnings includes current year income less dividends Balances in temporary accounts are zero

Match the accounts with the correct terms.

Temporary: revenues, expenses, dividends Permanent: assets, liabilities, equity

Which of the following statements most accurately describes the purposes of the closing entries?

To establish zero balances in the income statement and dividend accounts and to transfer net income and dividends into retained earnings Wrong: To establish zero balances in the balance sheet accounts and to transfer net income and dividends into retained earnings - Reason: The balance sheet accounts are permanent accounts. They will not be reduced to zero during the closing process. The income statement accounts and dividends will be cleared out so that revenues and expenses can be tracked for the next accounting period. To bring the balances in the revenue and expense accounts up to date and to transfer net income and dividends into retained earnings - Reason: The balances in the revenue and expense accounts are up to date after completing the adjustment process. The closing process transfers those balances to retained earnings and zeros out the accounts so that they can begin tracking the results of the next period. To bring the balances in the asset and liability accounts up to date and to transfer net income and dividends into retained earnings - Reason: The balances in the asset and liability accounts are up to date after completing the adjustment process. The closing process clears out the revenue, expense and dividend accounts so that they can begin tracking the results of the next period.

A closing entry may include a ______.

credit to Wages Expense Wrong: debit to Prepaid Insurance -Reason: This is an asset. Assets are not closed at the end of the period. debit to Deferred Revenue - Reason: This is a liability. Liabilities are not closed at the end of the period. credit to Interest Revenue - Reason: Revenues are closed with a debit entry since they normally carry a credit balance.

During the year, Smite Company declared and paid dividends in the amount of $50,000. As part of the closing process, Smite should

debit retained earnings and credit dividends

Retained earnings is an example of a ____ account, meaning its balance is carried forward from one period to the next. (One word per blank).

permanent

Wald Corporation's adjusted trial balance shows the following temporary accounts: service revenue: $20,000; salaries expense $8,000; insurance expense: $2,000; utilities expense: $3,000; interest expense $200; and depreciation expense: $1,400. As part of the the closing process, Wald should debit

service revenue

How do temporary accounts differ from permanent accounts?

Only temporary accounts are cleared out at the end of the accounting period. Wrong: Only permanent accounts are transferred to Retained Earnings during the closing process. - Reason: Temporary accounts are transferred to Retained Earnings during the closing process. Only permanent accounts are found on the financial statements. - Reason: Revenues and expenses are found in the income statement, and they are temporary accounts. Balance sheet accounts are all permanent accounts. Only temporary accounts are used in the adjustments at the end of the accounting period. - Reason: Adjusting entries involve one balance sheet account and one income statement account. Revenues and expenses are found in the income statement, and they are temporary accounts. Balance sheet accounts are all permanent accounts.

Which of the following statements is true regarding the post-closing trial balance?

The post-closing trial balance is an internal report prepared as the last step in the accounting cycle. Wrong: The post-closing trial balance proves that all entries have been made correctly and accurately during the accounting period. - Reason: While a post-closing trial balance does show that debits equal credits, it does not verify that all entries were correct. It only verifies that amounts entered on the debit side of an account match those entered on the credit side. It does not detect when an entry is made to the wrong account or when an entry is omitted altogether. The post-closing trial balance is a report prepared before the adjustments and the financial statements to prove that debits equal credits. - Reason: The report described in this option is an unadjusted trial balance. The post-closing trial balance is prepared after adjustments and closing entries are recorded.

True or false: After the closing entries have been posted, the new balance in the Retained Earnings account will equal the Retained Earnings reported in the balance sheet.

True - Reason: The beginning balance of Retained earnings has been increased by net income and decreased by dividends. This calculation summarizes the effects of the closing entries on the retained earnings account.