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