Accounting Chapter 4 Review: Completing the Accounting Cycle
On December 31, before the closing entries, the following information is available for Jones Company: Service Revenue $12,000 Total Expenses 6,000 Jones, Withdrawals 2,000 Jones, Capital 15,000 The balance of Jones, Capital after all closing entries would be:
$19,000 (Add $12,000 Service Revenue and Jones, Capital; Subtract Total Expenses and Jones, Withdrawals)
Which accounts are current liabilities?
- Accounts Payable - Notes Payable (due within one year) - Salaries Payable - Interest Payable - Unearned Revenue
As listed on page 183 of the textbook, what accounts come from the Statement of Owner's Equity?
- Bright, Capital - Bright, withdrawals
What are examples of current assets?
- Cash - Accounts Receivable - Office Supplies - Prepaid Rent, insurance
What are examples of Intangible assets?
- Patents - Copyrights - Trademarks
As listed on page 183 of the textbook, what accounts come from the Income Statement?
- Service Revenue - Rent Expense - Salaries Expense - Supplies Expense - Utilities Expense - Depreciation Expense- Building - Depreciation Expense- Furniture - Interest Expense
What would happen if a business had a net LOSS for the period?
- The Income Summary T-Account would hold a DEBIT balance instead of a credit balance. - The closing entry to close Income Summary would be a DEBIT to Owner, Capital and a credit to Income Summary! Ex: (closing entry) 12/31/18 Owner, Capital 2,000 Income Summary 2,000
Balance sheet form that lists the assets on the left side and liabilities and the owner's equity on the right side
Account Form
The process by which companies produce their financial statements for a specific period.
Accounting Cycle
Which of the following accounts appears in one of the Balance Sheet columns of the worksheet?
Accounts Receivable
Reports assets, liabilities, and owner's equity as of the last day of the period.
Balance Sheet
Which of the following accounts is considered a permanent account?
Cash
A balance sheet that places each asset and each liability into a specific category.
Classified Balance Sheet
A step in the Accounting Cycle that occurs at the end of the period. This process consists of journalizing and posting the closing entries to set the balances of the revenues, expenses, Income Summary, and Owner, Withdrawals accounts to ZERO for the next period.
Closing Process
An asset that is expected to be converted to cash, sold, or used up during the next 12 months or within the business's normal operating cycle is longer than a year.
Current Asset
Identify the category in which each account listed would appear on a classified balance sheet. Office Supplies
Current Assets
A liability that MUST be paid either with cash or with goods and services within one year or within the entity's operating cycle if the cycle is longer than one year.
Current Liabilities
Identify the category in which each account listed would appear on a classified balance sheet. Interest Payable
Current Liabilities
Reports revenues and expenses and calculates net income or net loss for the time period.
Income Statement
Are all liabilities that do NOT need to be paid within one year or within the entity's operating cycle, whichever is longer. Ex: Many Notes Payable (mortgage)
Long-term Liabilities
Identify the category in which each account listed would appear on a classified balance sheet. Notes Payable (due on 6 years)
Long-term Liabilities
Identify the category in which each account listed would appear on a classified balance sheet. Land (held for long-term investment purposes)
Long-term investments
For the Income Summary, a credit balance =
Net Income
For the Income Summary, a debit balance =
Net Loss
Identify the category in which each account listed would appear on a classified balance sheet. Golub, Capital
Owner's Equity
Income Summary: - It's ending balance- net income or net loss- is then transferred (closed) to the ___________________ (the final account in the closing process).
Owner, Capital Account
Only what appears on the Post-Closing Trial balance?
PERMANENT ACCOUNTS- assets, liabilities, and the Owner, Capital
Temporary or Permanent Account? Equipment
Permanent
Temporary or Permanent Account? Morrison, Capital
Permanent
Temporary or Permanent Account? Prepaid Rent
Permanent
A special journal entry that eases the burden of accounting for transactions in the next period. Such entries are the exact opposite of prior adjusting entries.
Reversing Entry
Which of the following accounts would NOT appear on the post-closing trial balance?
Service Revenue
Temporary or Permanent Account? Morrison, Withdrawals
Temporary
Temporary or Permanent Account? Supplies Expense
Temporary
Permanent Account Balances are ______________ into the next time period.
carried forward
All temporary accounts, (revenues, expenses, and withdrawals) are ___________________.
closed (zeroed)
A classified balance sheet reports 2 asset categories:
current assets and long term assets
In step #3 of closing the books, we will __________ Income Summary and ____________ Owner's, Capital.
debit, credit Ex: 12/31/18 Income Summary 8,550 Lewis, Capital 8,550
In step #4, the account will be closed with a _________ to Owner's Capital and a ____________ to Owner, Withdrawals.
debit, credit Ex: 12/31/18 Lewis, Capital 5,000 Lewis, Withdrawals 5,000
Intangible assets are ________________ that convey special rights, such as the exclusive right to produce or sell an invention (patent) or book (copyright), or the symbol or image of a distinctive brand (trademark).
long-term assets
Any portion of a _______________ that is due within the next year is also reported as a current liability.
long-term liability
A business starts a new time period with a ______________________ in the temporary accounts.
zero beginning balance
The Income Summary is like a _____________ that shows the amount of net income or net loss for the current period,
"holding tank"
To ensure that you didn't make any errors in the closing process, you can compare the Adjusted Trial Balance to the Post-closing Trial Balance to ensure that :
1.) Account balances above Owner, Capital are the same 2.) Account balances below Owner, Capital are zero and therefore not included 3.) The Owner, Capital account matches Owner, Capital on the Balance Sheet
The operating cycle is the time span when...
1.) Cash is used to acquire goods and services 2.) These goods and services are sold to customers 3.) The business collects cash from customers.
Accounting takes place during 2 different times:
1.) During the period (Steps 1- 3): Journalizing transactions and posting to the accounts 2.) End of the period (Steps 4 - 10): Adjusting the accounts, preparing the financial statements, and closing the accounts
List the 9 Steps of the Accounting Cycle.
1.) Journalize entries 2.) Post-to-ledger 3.) Prepare the unadjusted trial balance 4.) Journalize adjusting entries 5.) Post adjusting entries to ledger 6.) Prepare adjusted trial balance 7.) Prepare Financial statements 8.) Closing entries 9.) Prepare the Post-closing Trial Balance
What are the 3 categories of long-term assets?
1.) Long-term investments 2.) Property, plant, and equipment 3.) Intangible assets
4 Steps in Closing the Books:
1.) Make the revenue accounts equal ZERO via the Income Summary account. (This closing entry transfers total revenues to the credit side of the Income Summary Account). 2.) Makes expense accounts equal zero via the Income Summary account. (This closing entry transfers total expenses to the debit side of the Income Summary account). 3.) Make the Income Summary account equal to zero via the Owner, Capital account. (This closing entry transfers net income (or net loss) to the Owner, Capital account). 4.) Make the Owner, Withdrawals account equal zero via the Owner, Capital account. (This entry transfers the withdrawals to the debit side of the Owner, Capital account).
What are the 2 Relationships Among the Financial Statements that are Important to Know?
1.) Net income from the income statement INCREASES owner's capital on the statement of owner's equity. A net loss DECREASES owner's capital. 2.) Ending Owner, Capital from the statement of owner's equity goes to the balance sheet and makes total liabilities plus total owner's equity equal total assets, satisfying the accounting equation.
Jones Company has Cash of $600, Accounts Receivable of $500, Office Supplies of $100, and a Building with a cost of $50,000. Jones Company owes $300 on Accounts Payable and has Salaries Payable of $200. What is Jones Company's current ratio?
2.40 (600 + 500 + 100/ 300 + 200)
Which of the following accounts would appear on the post-closing trial balance?
Accounts Receivable
Which of the following accounts would be included in the Current Assets category of the classified Balance Sheet?
Accounts Receivable
_____________ are relatively liquid because receivables are collected quickly.
Accounts Receivable
Which of the steps below comes first in the accounting cycle?
Analyze and journalize transactions
Which of the following steps of the accounting cycle is done continuously through the accounting cycle (NOT just done at the end of an accounting period)?
Analyze and journalize transactions as they occur
What does the closing entry for expenses look like?
Date Income Summary (total expenses) Expense Expense Expense Expense
After completing the closing entries for Revenues and Expenses, the Income Summary account has a credit balance of $1,500. The journal entry to close out the $1,500 credit balance of Income Summary would be:
Date Income Summary 1,500 Smith, Capital 1,500
The journal entry to close out a debit balance in Rent Expense of $200 for the period would be:
Date Income Summary 200 Rent Expense 200
What does the closing entry for revenue look like?
Date Revenue Income Summary
Smith Company recorded an adjustment for salaries on December 31 of $1,500. On January 1 of the following year, the company reverses this adjusting entry before payment. What is the journal entry made on January 1 to reverse the adjusting entry made on December 31 of the previous year?
Date Salaries Payable 1,500 Salaries Expense 1,500
The journal entry to close out a credit balance in Service Revenues of $2,000 for the period would be:
Date Service Revenue 2,000 Income Summary 2,000
The journal entry to close out a $200 debit balance in the Withdrawals account for the period would be:
Date Smith Capital 200 Smith Withdrawals 200
When making expenses equal ZERO, create a T-account for each expense account. Each individual expense account will be CREDITED and the Income Summary will be DEBITED for the total amount of expenses.
Example: 12/31/18 Income Summary 8,950 Rent Expense 3,000 Salaries Expense 4,800 Supplies Expense 400
Why are Temporary Accounts (revenue, expenses, Income Summary, or Owner, Withdrawals) NOT included in the Post-Closing Trial Balance?
They are temporary accounts that have been closed.
As listed on page 183 of the textbook, what accounts come from the Balance Sheet?
- Cash - Accounts Receivable - Office Supplies - Prepaid Rent - Land - Building - Accumulated Depreciation- Building - Furniture - Accumulated Depreciation- Furniture - Accounts Payable - Utilities Payable - Salaries Payable - Interest Payable - Unearned Revenue - Notes Payable
How can you determine if the balance you got on the Income Summary T-Chart is correct?
- The balance on the Income Summary T-chart should be the same as what is on the Income Statement. - So.... look at the Income Statement!!
For most businesses, the operating cycle is how long?
A few months
ALL ACCOUNTS ON THE _______________ ARE PERMANENT ACCOUNTS!!
BALANCE SHEET
Which of the following accounts would be included in the Plant Asset category of the classified Balance Sheet?
Building
Which of the following accounts is NOT closed at the end of the accounting period?
Building (Assets are not closed; they are permanent accounts. Building is an asset and is not closed at the end of an account period.)
In a classified balance sheet, how are liabilities classified?
By the order in which they must be paid: either current (within one year) or long term (more than one year).
In a _____________________, each asset and each liability are placed into a specific category or classification.
Classified Balance Sheet
Entries that transfer the revenues, expenses, and Owner's Withdrawals balances to the Owner, Capital account to prepare the company's books for the next period.
Closing Entries
Which of the following is generally a FALSE statement for the current ratio analysis?
Companies want a current ratio number below 1
Identify the category in which each account listed would appear on a classified balance sheet. Unearned Revenue
Current Liabilities
The 2 liability categories reported on the balance sheet are ______________________________.
Current Liabilities and Long-term Liabilities
A list of the accounts and their balances at the end of the period after journalizing and posting the closing entries. It should include ONLY permanent accounts.
Post-Closing Trial Balance
A temporary account into which revenues and expenses are transferred prior to their final transfer into the Owner, Capital account. Summaries net income (or net loss) for the period.
Income Summary
An asset with no physical form that is valuable because of the special rights it carries.
Intangible Asset
Identify the category in which each account listed would appear on a classified balance sheet. Copyrights
Intangible Assets
A measure of how quickly an item can be converted into cash.
Liquidity
Are all the assets that will NOT be converted to cash if used up within the business's operating cycle or one year, whichever is greater.
Long-term asset
Investments in bonds (debt securities) or stocks (equity securities) in which the company intends to hold the investment for LONGER than one year. Ex: Notes Receivable
Long-term investment
Temporary or Permanent Account? Office Supplies
Permanent
Temporary or Permanent Account? Salaries Payable
Permanent
Also known as real accounts - the assets, liabilities, and Owner's Capital Accounts- are NOT closed at the end of the period.
Permanent Account
Identify the category in which each account listed would appear on a classified balance sheet. Accumulated Depreciation- Furniture
Property, Land, and Equipment
Identify the category in which each account listed would appear on a classified balance sheet. Land
Property, Land, and Equipment
Long-lived, tangible assets such as land, buildings, and equipment, used in the operation of a business.
Property, Plant, and Equipment (A.K.A. fixed assets or plant assets)
What is a helpful acronym when determining the order for closing entries?
R: revenue E: expenses I: income summary D: withdrawals
Which of the following accounts appears in one of the Income Statement columns of the worksheet?
Rent Expense
Balance sheet form that lists the assets at the top and liabilities and owner's equity below
Report Form
Shows how capital changed during the period due to owner contributions, net income (or net loss), and owner withdrawals
Statement of Owner's Equity
Temporary or Permanent Account? Rent Expense
Temporary
Temporary or Permanent Account? Service Revenue
Temporary
An account that relates to a particular accounting period and is closed at the end of the period- the revenues, expenses, Income Summary, and Owner, Withdrawals accounts.
Temporary Account (A.K.A. nominal accounts)
The balance sheet lists liabilities in what way?
The order in which they must be paid
In a classified balance sheet, how are ASSETS shown?
They are in the order of liquidity - Cash and A/R usually go first
On the worksheet, after totaling the debit and credit Balance Sheet columns, the difference is ________.
the amount of net income or net loss for the period