Fundamental Accounting Principles Wild, 22e Chapter 4

Steps and Purpose closing

(1) identify accounts for closing, (2) record and post the closing entries, and (3) prepare a post-closing trial balance. The purpose of the closing process is twofold. First, it resets revenue, expense, and withdrawals account balances to zero at the end of each period (which also updates the owner's capital account for inclusion on the balance sheet).

Permanent Accounts

Accounts that reflect activities related to one or more future periods; balance sheet accounts whose balances are not closed; also called <em>real accounts.

temporary or nominal accounts

Accounts used to record revenues, expenses, and withdrawals (dividends for a corporation); they are closed at the end of each period; also called, he closing process applies only to temporary accounts.

Work sheet benefits

Aids the preparation of financial statements. Reduces the possibility of errors when working with many accounts and adjustments. Links accounts and adjustments to their impacts in financial statements. Assists in planning and organizing an audit of financial statements — as it can be used to reflect any adjustments necessary. Helps in preparing interim (monthly and quarterly) financial statements when the journalizing and posting of adjusting entries are postponed until year-end. Shows the effects of proposed or "what-if" transactions.

Working Papers

Analyses and other informal reports prepared by accountants and managers when organizing information for formal reports and financial statements.

Unclassified Balance Sheet

Balance sheet that broadly groups assets, liabilities, and equity accounts.

Classified Balance Sheet

Balance sheet that presents assets and liabilities in relevant subgroups, including current and noncurrent classifications.A classified balance sheet has no required layout, but it usually contains

Current Assets

Cash and other assets expected to be sold, collected, or used within one year or the company's operating cycle, whichever is longer.

closing entries

Entries recorded at the end of each accounting period to transfer end-of-period balances in revenue, gain, expense, loss, and withdrawal (dividend for a corporation) accounts to the capital account (to retained earnings for a corporation).

Post-closing trial balance

List of permanent accounts and their balances from the ledger after all closing entries are journalized and posted.

intangible assets

Long-term assets (resources) used to produce or sell products or services; usually lack physical form and have uncertain benefits.

long-term investments

Long-term assets not used in operating activities such as notes receivable and investments in stocks and bonds.

Closing Process

Necessary end-of-period steps to prepare the accounts for recording the transactions of the next period.

Operating Cycle

Normal time between paying cash for merchandise or employee services and receiving cash from customers.

Current Liabilities

Obligations due to be paid or settled within one year or the company's operating cycle, whichever is longer.

long term liabilities

Obligations not due to be paid within one year or the operating cycle, whichever is longer.

current ratio

Ratio used to evaluate a company's ability to pay its short-term obligations, calculated by dividing current assets by current liabilities.

Accounting Cycle

Recurring steps performed each accounting period, starting with analyzing transactions and continuing through the post-closing trial balance (or reversing entries).

Closing entries are necessary at the end of each period after financial statements are prepared because

Revenue, expense, and withdrawals accounts must begin each period with zero balances. Owner's capital must reflect prior periods' revenues, expenses, and withdrawals.

work sheet

Spreadsheet used to draft an unadjusted trial balance, adjusting entries, adjusted trial balance, and financial statements.

Pro forma financial Statements

Statements that show the effects of proposed transactions and events as if they had occurred.

Income Summary

Temporary account used only in the closing process to which the balances of revenue and expense accounts (including any gains or losses) are transferred; its balance is transferred to the capital account (or retained earnings for a corporation).