Chapter 4 (Summary)

Explain the importance of and illustrate the preparation of a post-closing trial balance.

A post-closing trial balance is prepared after all closing entries have been journalized and posted. The post-closing trial balance proves the quality of the debits and credits. The post-closing trial balance contains only permanent (balance sheet) accounts, because all temporary accounts were closed out before preparation of the post-closing trial balance and will have zero balances.

Explain transaction analysis, including the use of the accounting equation.

A transaction is an economic event that involves a change in an asset, a liability, or stockholders' equity. The accounting equation assess the effect of transactions of assets, liabilities, or stockholders' equity: Assets = Liabilities + Stockholders' Equity The expanded accounting equation includes income statement items and dividends: Assets = Liabilities + Contributed Capital + Accumulated Other Comprehensive Income + Beginning Retained Earnings - Dividends Declared + Revenues and Gains - Expenses and Losses A double-entry system is one in which all transactions affect at least two accounts and the accounting equation always holds.

Explain the importance of and illustrate the preparation of an unadjusted trial balance.

A trial balance is a listing of the accounts and their ending debit or credit balances at a point in time. The balance sheet accounts are listed first (assets, liabilities, and equity), follow by dividends and the income statement accounts (revenues, gains, expenses, and loses). The trial balance provides a check on the recording process by ensuring the equality of debits and credits. The trial balance does not prove the accuracy of the recording process and will not reveal whether: - A transaction is not journalized. - A correct journal entry is not posted. - An entry is posted twice. -Incorrect accounts are used. - An entry is made using incorrect dollar amounts. An unadjusted trial balance may not reflect all of the events and circumstances of the company because the adjusted journal entries have not been made at the time the unadjusted trial balance is compiled.

Explain the use of and illustrate the preparation of an adjusted trial balance.

An adjusted trial balance reflects all of the events and circumstances of the company after it makes the adjusting journal entries to check that the amount of debits equals the amount of credits.

Discuss the need for adjusting journal entries and explain deferrals and accruals.

Companies record adjusting journal entries (AJEs) at the end of each accounting period to ensure that the financial statements are presented under the accrual basis of accounting. Deferral AJEs occur when cash is received or paid before the revenue or expense is recognized in the financial statements. - A deferred expense occurs when a cash payment is made before an expense should appropriately be recognized in the financial statements under accrual basis of accounting. - A deferred revenue occurs when cash is received before revenue should appropriately be recognized in the financial statements under accrual basis accounting. Accrual AJEs are created when the economic event that gives rise to accrual basis revenue or expense occurs before the cash is received or paid. - Accrued revenues occur when control of a good or service has passed to the customer, but cash has not yet been received. - Accrued expenses occur when expenses have been incurred, bit cash has not yet been paid.

Describe the preparation of the financial statements from the adjusted trial balance.

From the account balances in the adjusted trial balance, the company can prepare financial statements. - The income statement is prepared first, using the revenue, gains, losses, and expense accounts. - The resulting new income for the period, along with equity accounts, is used to prepare the statement of stockholders' equity. - The balance sheet is prepared by including all assets, liabilities, common stock, and the ending retained earnings balance obtained from the statement of stockholders' equity.

Explain the difference between permanent and temporary accounts and demonstrate the process of closing temporary accounts.

Incomes statement accounts and dividends are temporary accounts. These accounts must be reduced to zero at the end of each period. Closing is the process of zeroing out temporary accounts. In addition to all of the income statement accounts, dividends is also a temporary account and must be closed. Permanent accounts are on the balance sheet. Permanent accounts are not closed at the end of the period. Four entries are required to close the temporary accounts: 1. Close out revenue and gain accounts: Debit each revenue and gain account and credit income summary for the total of the accounts debited. 2. Close out expense and loss accounts: Debit income summary for the total of expenses and losses, and credit each expense and loss account for its balance. 3. Close out income summary account: Debit income summary and credit retained earnings for the amount of net income; conversely, credit income summary and debit retained earnings for the amount of any net loss. 4. Close out dividends account: Debit retained earnings and credit dividends for the period. The income summary account facilitates the closing process and is not included in the financial statements.

Illustrate journalizing transactions, including determining whether to debit or credit accounts.

Journalizing a transaction involves preparing a journal entry. The common format includes: a. The date the transaction occurred in the first column. b. Accounts that are debited are listed first and positioned to the left side. c. Accounts that are credited are recorded next and indented to the right. d. A brief explanation below the entry. An account is an individual record of increases and decreases in specific asset, liability, and stockholders' equity items. The terms debit and credit mean left and right, respectively. Assets increase with a debit and decrease with a credit. Liability and equity accounts increase with a credit and decrease with a debit. Revenues and gains are increases in equity; these accounts will increase with credits. Expenses and losses decrease equity, so they increase with a debit. Similarly, dividends decrease equity, so they increase with debits. The normal balance of an account refers to its typical account balance -- debit or credit.

Explain the importance of and show how to post journal entries to the general ledger.

Posting describes the transferring of information contained in journal entries to individual ledger accounts. The general ledger contains all accounts maintained by the company -- with each account reflecting its increases, decreases, and balance -- in a single location for management analysis. The general ledger has a column for the date, explanation, reference, debit, credit, and balance. The reference is the general journal page number where the original journal entry occurred. T-accounts are used to debit the account. They have three main parts: a. The account title b. A left (debit) side c. A right (credit) side

Describe the accounting cycle.

The accounting cycles describes the process by which companies record business transactions in their books, which they ultimately aggregate and summarize in the financial statements.