Chapter 4

The following accounts appear in an adjusted trial balance of Hindsight Consulting. Indicate whether each account would be reported in the (a) current asset; (b) property, plant, and equipment; (c) current liability; (d) long-term liability; or (e) owner's equity section of the December 31, 20Y1, balance sheet of Hindsight Consulting. 1. Jason Corbin, Capital 2. Notes Receivable (due in six months) 3. Notes Payable (due in 10 years) 4. Land 5. Cash 6. Unearned Rent (three months) 7. Accumulated Depreciation - Equipment 8. Accounts Payable

1. Jason Corbin, Capital - (e) owner's equity section 2. Notes Receivable (due in six months) - (a) current asset section 3. Notes Payable (due in 10 years) - (d) long-term liability 4. Land - (b) property, plant, and equipment 5. Cash - (a) current asset 6. Unearned Rent (three months) - (a) current liability 7. Accumulated Depreciation-Equipment - (c) property, plant, and equipment 8. Accounts Payable - (c) current liability

From the list that follows, identify the type of account (asset, contra-asset, liability, capital, drawing, revenue, expense) and whether each account is Permanent or Temporary. Then identify the accounts that should be closed to the owner's capital account at the end of the year. 1. Office Equipment 2. Utilities Expense 3. Accumulated Depreciation 4. Unearned Rent 5. Fees Earned 6. Doug Johnson, Drawing 7. Rent Revenue 8. Supplies

1. Office Equipment - Asset/Permanent 2. Utilities Expense - Expense/Temporary 3. Accumulated Depreciation - Contra-asset/permanent 4. Unearned Rent - Liability/Permanent 5. Fees Earned - Revenue/Temporary 6. Doug Johnson, Drawing - Capital/temporary 7. Rent Revenue - Revenue/temporary 8. Supplies - Asset/Permanent

The balances for the accounts that follow appear in the Adjusted Trial Balance columns of the end-of-period spreadsheet. Indicate whether each account would flow into the income statement, statement of owner's equity, or balance sheet. 1. Office Equipment 2. Utilities Expense 3. Accumulated Depreciation 4. Unearned Rent 5. Fees Earned 6. Doug Johnson, Drawing 7. Rent Revenue 8. Supplies

1. Office Equipment - Balance sheet 2. Utilities Expense - Income Statement 3. Accumulated Depreciation - Balance sheet 4. Unearned Rent - Income Statement 5. Fees Earned - Income Statement 6. Doug Johnson, Drawing - Statement of Owner's Equity 7. Rent Revenue - Income Statement 8. Supplies - Balance Sheet

Accounting Cycle

1. Transactions or analyzed and recorded in the journal 2. Transactions are posted to the ledger 3. An unadjusted trial balance is prepared 4. Adjustment data are assembled and analyzed 5. An optional end-of-period spreadsheet is prepared. 6. Adjusting entries are journalized and posted to the ledger. 7. An adjusted trial balance is prepared 8. Financial statements are prepared. 9. Closing entries are journalized and posted to the ledger. 10. A post-closing trial balance is prepared

What are the journal entries used to close temporary revenue and expense accounts using a clearing account?

1st entry: Closes the revenue accounts to Income Summary 2nd entry: Closes the expense accounts to Income Summary 3rd Entry: Closes the income summary accounts to Income Summary 4th Entry: Closes the owner's drawing account to owner's equity.

How many steps to prepare an end-of-period spreadsheet?

6

What is the Statement of Owner's Equity? (Equation)

Beginning Capital Balance + Investments + Net Income (- Net Loss) - Withdrawals = Ending Capital Balance

(T/F) Temporary accounts do appear on the post-closing trial balances

False Temporary accounts do NOT appear on the post-closing trial balances.

How many journal entries are used to close temporary revenue and expense accounts using a clearing account?

Four

Assume that the entry closing total revennues of $3,190,000 and total expenses of $2,350,000 has been made for the year ending December 31. At the endo f the fiscal year, Teresa Shafer, Capital has a credit balance of $1,855,000 and Teresa Schafer, Drawing has a balance of $770,000. a. Journalize the entry required to close the Teresa Schafer, Drawing account. Answer format: Account name (debit/credit) amount b. Determine the amount of Teresa Schafer, Capital at the end of the period.

a. Teresa Shafer, Capital (credit) $770,000 Teresa Shafer, Drawing (debit) $770,000 b. $1,995,000 Ending capital = Beginning Capital + Investments +/- Net Income (Loss) - Withdrawals

Rearrange the following steps in the accounting cycle in proper sequence: a. Transactions are analyzed and recorded in the journal. b. An unadjusted trial balance is prepared. c. Transactions are posted to the ledger. d. Adjustments data are assembled and analyzed. e. An adjusted trial balance is prepared. f. Adjusting entries are journalized and posted to the ledger. g. An optional end-of-period spreadsheet is prepared. h. A post-closing trial balance is prepared. i. Financial statements are prepared. j. Closing entries are journalized and posted to the ledger.

a. Transactions are analyzed and recorded in the journal. #1 b. An unadjusted trial balance is prepared. (#3) c. Transactions are posted to the ledger. (#2) d. Adjustments data are assembled and analyzed. (#4) e. An adjusted trial balance is prepared. (#7) f. Adjusting entries are journalized and posted to the ledger. (#6) g. An optional end-of-period spreadsheet is prepared. (#5) h. A post-closing trial balance is prepared. (#10) i. Financial statements are prepared. (#8) j. Closing entries are journalized and posted to the ledger. (#9)

Property, plant, and equipment are also called ____ assets or _____ plant assets.

fixed; plant

Property, plant, and equipment include:

land and assets that depreciate over a period off time.

Temporary accounts are also known as _____ accounts.

nominal

To report amounts for only one period, (temporary/nominal) accounts should have (negative/zero/positive) balances at the beginning of the next period.

temporary, zero

Examples of accounts reported on the balance sheet.

Assets Liabilities Capital

Current Assets

Assets that are expected to be converted into cash or sold or used up usually within one year or less, through the normal operations of the business

Accumulated depreciation appears on the _____ sheet in the _________ section.

Balance; Property, Plant, and Equipment

What is the purpose of the post-closing trial balance?

To verify that the ledger is in balance at the beginning of the next period.

Examples of temporary accounts

Revenue Expense Withdrawals accounts

First closing journal entry

Revenue and expense account balance are transferred to the owner's capital account.

Examples of what accounts are tied to temporary accounts.

Revenues Expenses Drawing

_____ increase owner's equity and expenses and _____ decrease owner's equity.

Revenues; withdrawals

How are temporary accounts made to have a zero balance at the beginning of a period?

Temporary accounts balances are transferred to permanent accounts at the end of account period through journal entries.

Closing Process

The PROCESS of transferring temporary account balances to permanent account balances via journal entries.

Second closing journal entry

The balance of the owner's drawing account is transferred to the owner's capital account.

(T/F) After the closing entries are posted, all of the temporary accounts (revenues, expenses, drawing) have ZERO balances.

True

(T/F) Real accounts are reported on the balance sheet.

True

(T/F) The balances of real accounts are carried forward from year to year.

True

Why are notes receivable and accounts receivable considered current assets?

They are usually converted to cash within one year or less.

Permanent accounts are also known as ____ accounts.

real

Owner's Equity

the owner's right to the assets of the business.

Owner's equity is added to the __________, and this combined total must be equal to ________.

total liabilities; total assets

After the closing entries are posted, all of the temporary accounts have (negative, zero, positive) balances.

zero

Prior to closing, total revenues were $8,315,000 and total expenses were $6,460,000. During the year, the owner made no additional investments and withdrew $408,000. After the closing entries, how much did the owner's capital account change?

$1,447,000 Total revenues-Total expenses-withdrawals=capital account change $8,315,000-$6,460,000-$408,000=$1,447,800

Balances for each of the following accounts appear in an adjusted trial balance. Identify each as an asset, liability, revenue, or expense. 1. Accounts Receivable 2. Equipment 3. Fees Earned 4. Insurance Expense 5. Land 6. Prepaid Rent 7. Rent Revenue 8. Salary Expense 9. Salary Payable 10. Supplies 11. Unearned Rent 12. Wages Payable

1. Asset 2. Asset 3. Revenue 4. Expense 5. Asset 6. Asset 7. Revenue 8. Expense 9. Liability 10. Asset 11. Liability 12. Liability

The balances for the accounts that follow appear in the Adjusted Trial Balance columns of the end-of-period spreadsheet. Indicate whether each account would flow into the income statement, statement of owner's equity, or balance sheet. 1. Accounts Payable 2. Accounts Receivable 3. Cash 4. Eddy Rosewood, Drawing 5. Fees Earned 6. Supplies 7. Unearned Rent 8. Utilities Expense 9. Wages Expense 10. Wages Payable

1. Balance sheet 2. Balance sheet 3. Balance sheet 4. Statements of owner's equity 5. Income Statement 6. Balance sheet 7. Balance sheet 8. Income Statement 9. Income Statement 10. Balance sheet

What are the two sections that assets are commonly divided into on a balance sheet?

1. Current assets 2. Property, plant, and equipment.

What are the two sections that liabilities are commonly divided into?

1. Current liabilities 2. Long-term liabilities

What are the steps to prepare an end-of-period spreadsheet?

1. Enter the title 2. Enter the unadjusted trial balance 3. Enter the adjustments 4. Enter the adjusted trial balance 5. Extend the accounts to the Income Statement and Balance Sheet columns. 6. Total the Income Statement and Balance Sheet columns, compute the net income or net loss, and complete the spreadsheet.

How many sections are liabilities divided into on a balance sheet?

2

Balance Sheet

A balance sheet that is expanded by adding subsections for assets and liabilities.

Permanent accounts

Accounts that are relatively permanent from year to year

Temporary Accounts

Accounts that report amounts for only one period

What information is available through temporary accounts?

All accounts reported on the income statement as well as the owner's drawing account, which is reported on the statement of owner's equity.

Current Liabilities

Amounts the business owes to creditors that will be due within a short time (usually within on year or less) that are to be paid out of current assets

Long-Term Liabilities

Amounts the business owes to creditors that will not be due for a long time (usually more than one year)

______ entries transfer temporary account balances to permanent account balances via journal entries.

Closing

How do you apply the first closing journal entry?

Debit each revenue account for its balance, credit each expense account for its balance, and credit (net income) or debit (net loss) the owner's capital account.

How is the second closing journal entry applied?

Debit the owner's capital account for the balance of the drawing account and credit the drawing account.

Liabilities are considered current when they will be paid out of current assets within ______ (answer is an amount of time).

One year or less (usually)

Examples of property, plant, and equipment

Equipment, machinery, buildings

(T/F) Accounts receivable are more formal than notes receivable

False Notes are more formal than accounts receivable

(T/F) Post-closing trial balances have a positive balance.

False Post-closing trial balances have a zero balance

(T/F) Temporary accounts are carried forward because they relate to only one period.

False Temporary accounts are NOT carried forward because they relate to only one period.

Liabilities are considered long-term when they will be paid out of current assets after ______ (answer is an amount of time).

More than one year (usually).

Examples of long-term liabilities

Notes payable Bonds payable Mortgage Payable

What is prepared after the closing entries have been posted?

Post-closing trial balance

What is step 5 of the accounting cycle?

Preparing and optional end-of-period spreadsheet

(T/F) It is possible to close the temporary revenue and expense accounts using a clearing account such as Income Summary, Revenue, and Expense Summary, or Profit and Loss Summary.

True In this care, four closing entries are made.

How many journal entries are included in closing entries?

Two

How many sections are assets divided into on a balance sheet?

Two

Closing Entries

Used to transfer balances in the revenue, expense, and withdrawals accounts to the owner's capital account, thereby leaving those accounts with a $0 balance to start the next accounting period.

Temporary accounts

Where the increases and decreases are accumulated during the accounting period.

Notes Receivable

Written promises by the customer to pay the amount of the note and interest.

From the list that follows, identify the accounts that should be closed to owner's capital account at the end of the fiscal year (YES/NO): a. Accounts Receivable b. Accumulated Depreciation c. Building d. Depreciation Expense e. Fees Earned f. Jackie Lindsay, Capital g. Jackie Lindsay, Drawing h. Land i. Supplies j. Supplies Expense k. Unearned Rent l. Wages Expense

a. NO b. NO c. NO d. YES e. YES f. NO g. YES h. NO i. NO j. YES k. NO l. YES

Owner's equity is presented on the ______ sheet below the _______ section.

balance; liabilities

Closing process is also known as ____ ___ _____.

closing the books