Accounting Ch. 4 Key Terms

Long-Term Investments

Also called non-current investments. Notes receivable and investments in stocks and bonds are long term assets when they are expected to be held for more than the longer of one year or the operating cycle. Land held for future expansion is a long-term investment because it is not used in operations.

Closing Process

An important step at the end of the accounting period AFTER financial statements are completed. Prepares accounts for recording the transactions and events of the next period.

Unclassified Balance Sheet

Broadly groups accounts into assets, liabilities, and equity.

Benefits of a Worksheet

Can be prepared in a manual or a digital form Internal accounting aid Not a substitute for journals, ledgers, or financial statements

Current Assets

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

Current Items

Expected to come due (either collected or owed) within one year or the company's operating cycle, whichever is longer.

Intangible Assets

Long term resources that benefit business operations but lack physical form. Examples: patents, trademarks, copyrights, franchises, and goodwill. Value comes from privileges or rights granted to or held by the owner.

Reversing Entries

OPTIONAL. Recorded in response to accrued assets and accrued liabilities that were created by adjusting entries at the end of a reporting period. The purpose of reversing entries is to simplify a company's record keeping.

Current Liabilities

Obligations due to be paid or settled within one year of the operating cycle. Usually settled by paying out cash. Often include accounts payable, notes payable, wages payable, taxes payable. Interest payable, or unearned revenues. Any portion of a long-term liability due to be paid within one year of the operating cycle is a current liability. Unearned revenues are current liabilities when they will be settled be delivering products or services within one year of the operating cycle. Current liabilities are reported in the order of those to be settled first.

Long-Term Liabilities

Obligations not due within one year or the operating cycle. Notes payable, mortgages maybe, bonds payable, and lease obligations are common.

Current Ratio

One measure of a company's ability to pay its short term obligations. Current Ratio = current assets/current liabilities

Classified Balance Sheet

Organized assets and liabilities into subgroups that provide more information to decision-makers.

Equity

Owner's claim on assets. For a proprietorship, this claim is reported in the equity section with an owner's capital account. For a partnership, the equity section reports a capital account for each partner. For a corporation, the equity section is divided up into two main subsections - contributed capital and retained earnings.

Temporary Accounts

Relate to one accounting period. Include all income statement accounts, the owner withdrawals account, and the Income Summary account. They are temporary because the accounts are opened at the beginning of a period, used to record transactions and events for that period, and then closed at the end of the period. The closing process applies ONLY to temporary accounts.

Permanent Accounts

Report on activities related to one or more future accounting periods. They include asset, liability, and owner capital accounts (all balance sheet accounts). Not close each period and carry their ending balance into future periods.

Purpose of the Closing Process

1) 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) 2) Helps in summarizing a period's revenues and expenses.

4 Step Closing Process

1. Close Credit Balances in Revenue Accounts to Income Summary 2. Close Debit Balances in Expense Accounts to Income Summary 3. Close Income Summary to Owner's Capital 4. Close Withdrawals Account to Owner's Capital

5 Steps to Prepare the Worksheet

1. Enter the unadjusted trial balance 2. Enter Adjustments 3. Prepare the adjusted trial balance 4. Sort Adjusted Trial Balance Amounts to Financial Statements 5. Total Statement Columns, Compute Income or Loss, and Balance Columns

3 Steps of the Closing Process

1. Identify accounts for closing 2. Record and post the closing entries 3. Prepare a post-closing trial balance

Post-Closing Trial Balance

A list of permanent accounts and their balances from the ledger after all closing entries have been journalized and posted. It lists the balances for all accounts not closed. These accounts comprise a company's assets, liabilities, and equity, which are identical to those in the balance sheet. The aim of a post-closing trial balance is to verify that: 1. Total debits equal total credits for permanent accounts 2. All temporary accounts have zero balances.

Components of a Complete Worksheet

A list of the accounts Their balances and adjustments Their sorting into financial statement columns Provides two columns each for the unadjusted trial balance, the adjustments, the adjusted trial balance, the income statement, and the balance sheet (including the statement of owner's equity)

Income Summary

A temporary account only used for the closing process that contains a credit for total revenues (and gains) and a debit for total expenses (and losses). Its balance equals net income or net loss and it is transferred to the capital account. Next, the withdrawals account balance is transferred to the capital account. After these closing entries are posted, the revenue, expense, withdrawals, and Income Summary accounts have zero balances.

Plant Assets

Tangible assets that are both long-lived and used to produce or sell products and services. Examples: equipment, machinery, buildings, and land that are used to produce or sell liquid products and services. The order listing is usually from most liquid to least liquid, such as equipment and machinery to buildings and land.

Operating Cycle

The time span from when cash is used to acquire goods and services until cash is received from the sale of goods and services. Length of a company's operating cycle depends on its activities.

Closing Entries

Transfer the end-of-period balances in revenue, expense, and withdrawals accounts to the permanent capital account. 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.