Accounting Chapter 4

Which is the only account to be closed DIRECTLY to retained earnings?

Dividends

Preparing a trial balance on the worksheet

Enter all ledger accounts with balances in the account titles column. Enter debit and credit amounts from the ledger in the trial balance columns.

What do these classifications help financial statement readers determine?

- whether the company has enough assets to pay its debts as they come due - the claims of short and long-term creditors on the company's total assets

How do you write the date on the post-closing trial balance.

--(date)--

How do you write the date on the income statement?

--For the Month Ended (Date)--

How do you write the date on the retained earnings statement?

--For the Month Ended (Date)--

What accounts are permanent?

- All asset accounts - all liability accounts - owners equity

What accounts are temporary?

- All revenue accounts - all expense accounts - dividends

Extending adjusted trial balance amounts to appropriate financial statement columns

- Asset account balances are recorded in the balance sheet debit column - Liability account balances are recorded in the balance sheet credit column - Accumulated depreciation (contra-asset) accounts are extended to the balance sheet credit column - Common stock and retained earnings balances are extended to the balance sheet credit column - Dividends are extended to the balance sheet debit column - Expense and revenue account balances are extended to the appropriate income statement columns

Correcting entries - an avoidable step

- Companies should correct errors, as soon as they discover them, by journalizing and posting correcting entries. -

Temporary accounts

- Relate only to a given accounting period. - They include all income statement accounts and the dividends account. - All temporary accounts are closed at the end of the period

Permanent accounts

- Relate to one or more future accounting periods. - They consist of all balance sheet accounts, including owners equity accounts. - They are not closed from period to period. Instead, the company carries forward the balances of permanent accounts into the next accounting period.

Owner's Equity

- The content of the owners' equity section varies with the form of business organization. In a proprietorship, there is one capital account. In a partnership, there is a capital account for each partner. - Corporations divide owners' equity into two accounts—Common Stock (sometimes referred to as Capital Stock) and Retained Earnings. - Corporations record stockholders' investments in the company by debiting an asset account and crediting the Common Stock account. - Corporations combine the Common Stock and Retained Earnings accounts and report them on the balance sheet as stockholders' equity

(Property, plant, and equipment) Depreciation

- The practice of allocating the cost of assets to a number of years. - Companies do this by systematically assigning a portion of an asset's cost as an expense each year (rather than expensing the full purchase price in the year of purchase). - The assets that the company depreciates are reported on the balance sheet at cost less accumulated depreciation.

Closing Entries

- formally recognize in the ledger the transfer of net income (or loss) and dividends to retained earnings - produce a zero balance in each temporary account

Classified balance sheet

- groups together similar assets and similar liabilities, using a number of classifications and sections - Useful because items within a group have similar economic characteristics.

Intangible Assets

- long-lived assets that do not have physical substance yet often are very valuable - One significant intangible asset is goodwill. Others include patents, copyrights, and trademarks or trade names that give the company exclusive right of use for a specified period of time.

Long-Term Liabilities

- obligations that a company expects to pay after one year. - Liabilities in this category include bonds payable, mortgages payable, long-term notes payable, lease liabilities, and pension liabilities.

Current Liabilities

- obligations that the company is to pay within the coming year or its operating cycle, whichever is longer. - Common examples are accounts payable, salaries and wages payable, notes payable, interest payable, and income taxes payable. - Also included as current liabilities are current maturities of long-term obligations—payments to be made within the next year on long-term obligations.

Reversing entries - an optional step

- the exact opposite of the adjusting entry made in the previous period. -

What are the steps in the accounting cycle?

1. Analyze business transactions 2. journalize the transactions 3. post to ledger accounts 4. prepare a trial balance 5. journalize and post adjusting entries: deferrals/accruals 6. Prepare an adjusted trial balance 7. prepare financial statements: income statement, retained earnings statement, balance sheet 8. journalize and post closing entries 9. prepare a post-closing trial balance

What are the four most efficient ways to post closing entries?

1. Debit each revenue account for its balance, and credit Income Summary for total revenues. 2. Debit Income Summary for total expenses, and credit each expense account for its balance. 3. Debit Income Summary and credit Retained Earnings for the amount of net income. 4. Debit Retained Earnings for the balance in the Dividends account, and credit Dividends for the same amount.

What are the Five steps for preparing a worksheet?

1. Prepare a trial balance on the worksheet 2. Enter adjustment data 3. enter adjusted balances 4. extend adjusted balances to appropriate statement columns 5. total the statement columns, compute net income (or loss), and complete the worksheet

List current assets in order of liquidity (most liquid to least)

1. cash and cash equivalents 2. short-term investments 3. accounts receivable 4. inventories 5. prepaid expenses and other current assets

Long term investments

1. investments in stocks and bonds of other companies that are normally held for many years 2. long-term assets such as land or buildings that a company is not currently using in its operating activities 3. long term notes receivable

Keying

A different letter identifies the debit and credit for each adjusting entry.

Entering adjusted balances into the adjusted trial balance columns

Combine the amounts entered in the first four columns of the worksheet for each account. For each account, the amount in the adjusted trial balance columns is the balance that will appear in the ledger after journalizing and posting the adjusting entries.

What are the standard classifications in a classified balance sheet?

Assets: - current assets - long-term investments - property, plant, and equipment - intangible assets Liabilities and owner's equity: - current liabilities - long-term liabilities - owners equity

Where is unearned revenue account extended?

Balance sheet credit column

How do you enter accrued salaries into the worksheet?

Debit salaries and wages expense for the amount given and credit an additional account, salaries and wages payable, for the given amount.

Entering the adjustments in the adjustment columns

In entering the adjustments, use applicable trial balance accounts. If additional accounts are needed, insert them on the lines immediately below the trial balance totals.

Where do companies enter "net income/loss" on the worksheet?

In the account titles space

Where do companies record closing entries?

In the general journal. A center caption, Closing Entries, inserted in the journal between the last adjusting entry and the first closing entry, identifies these entries. Then the company posts the closing entries to the ledger accounts.

Where is the amount of the net income entered?

Income statement debit column and the balance sheet credit column. Use the opposite columns for a net loss.

What is the intermediary account in the process of transferring closing entries to the retained earning account?

Income summary account

What are the two optional steps in the accounting cycle?

Reversing entries and correcting entries

Accumulated depreciation account

Shows the total amount of depreciation that the company has expensed thus far in the asset's life.

What happens to temporary accounts at the end of the accounting period?

Their balances are transferred to the permanent owners equity account, retained earnings, by means of closing entries.

Why do companies often use a classified balance sheet?

To improve users understanding of a company's financial position

How do you enter accrued interest into the worksheet?

You will need to add two additional accounts. Debit interest expense for the given amount and credit interest payable for the given amount

Worksheet

a multiple-column form used in the adjustment process and in preparing financial statements. It is not a permanent accounting record. It is neither a journal nor a part of the general ledger, but simply a device used in preparing adjusting entries and the financial statements.

Property, plant, and equipment

assets with relatively long useful lives the a company is currently using in operating the business. Includes: - land - buildings - machinery and equipment - delivery equipment - furniture

Long-term liabilities

obligations that a company expects to pay after one year. Includes: - bonds payable - mortgages payable - long-term notes payable - lease liabilities - pension liabilities

Net income/loss

the difference between the totals of the two income statement columns. - If total credits exceed total debits, the result is a net income - If the opposite is true, the result is a net loss