Financial Accounting 04

Closing Entries, step 2: Close the expense accounts to the Income Summary account.

- DR Income Summary; CR Expense accounts

Closing Entries, step 4: Close Dividends to Retained Earnings

- DR Retained Earnings; CR Dividends

Closing Entries, step 3: Close the Income Summary account to Retained Earnings.

- If Net Loss: DR Retained Earnings; CR Income Summary - If Net Income: DR Income Summary; CR Retained Earnings

Closing Entries, step 1: Close the revenue accounts to the Income Summary account.

-DR revenue; CR Income Summary

Steps in 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 and 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 post-closing trial balance.

Closing entries posting steps

1. Close the revenue accounts to the Income Summary account. 2. Close the expense accounts to the Income Summary account. 3. Close the Income Summary account to Retained Earnings. 4. Close Dividends to Retained Earnings.

Adjusted trial balance

A list of accounts and their balances after all adjustments have been made.

Post-closing trial balance

A list of permanent accounts and their balances after a company has journalized and posted closing entries.

Worksheet

A multiple-column form that companies may use in the adjustment process and in preparing financial statements.

Income Summary

A temporary account used in closing revenue and expense accounts.

Cash-basis accounting

Accounting basis in which a company records revenue only when it receives cash, and an expense only when it pays cash.

Accrual-basis accounting

Accounting basis in which companies record, in the periods in which the events occur, transactions that change a company's financial statements, even if cash was not exchanged.

Contra asset account

An account that is offset against an asset account on the balance sheet.

Fiscal year

An accounting period that is one year long.

Time period assumption

An assumption that the economic life of a business can be divided into artificial time periods.

Reversing entry

An entry made at the beginning of the next accounting period; the exact opposite of the adjusting entry made in the previous period.

Prepaid expenses (Prepayments)

Assets that result from the payment of expenses that benefit more than one accounting period.

Permanent accounts

Balance sheet accounts whose balances are carried forward to the next accounting period.

Unearned revenues

Cash received before a company earns revenues and recorded as a liability until earned.

Accrued revenues Adjusting Entry

Dr. Assets Cr. Revenues

Depreciation expense Adjusting Entry

Dr. Depreciation Expense Cr. Accumulated Depreciation

Prepaid Expense Adjusting Entry

Dr. Expenses Cr. Assets

Accrued expenses Adjusting Entry

Dr. Expenses Cr. Liabilities

Unearned Revenues Adjusting Entry

Dr. Liabilities Cr. Revenues

Closing entries

Entries at the end of an accounting period to transfer the balances of temporary accounts to a permanent stockholders' equity account, Retained Earnings.

Adjusting entries

Entries made at the end of an accounting period to ensure that the revenue recognition and matching principles are followed.

Accrued expenses

Expenses incurred but not yet paid in cash or recorded.

Quality of earnings

Indicates the level of full and transparent information that a company provides to users of its financial statements.

Temporary accounts

Revenue, expense, and dividend accounts whose balances a company transfers to Retained Earnings at the end of an accounting period.

Accrued revenues

Revenues earned but not yet received in cash or recorded.

Book value

The difference between the cost of a depreciable asset and its related accumulated depreciation.

Useful life

The length of service of a productive asset.

Earnings management

The planned timing of revenues, expenses, gains, and losses to smooth out bumps in net income.

Revenue recognition principle

The principle that companies recognize revenue in the accounting period in which it is earned.

Matching principle

The principle that dictates that companies match efforts (expenses) with accomplishments (revenues).

Depreciation

The process of allocating the cost of an asset to expense over its useful life.

List of temporary accounts

all revenue all expense Dividends Income Summary