Terms in this set (32)
journal entries that transfer the results of operations (net income or net loss) to owner's equity and reduce revenue, expense and drawing account balances to zero. The Worksheet contains the data necessary to make the closing entries.
Income Summary Account
A special owner's equity account that is used only in the closing process to summarize results of operations. It has a zero balance after the closing process, and it remains with a zero balance until after the closing procedure for the next period. It can be classified as a temporary owner's equity account, revenue and expense summary, or income and expense summary.
Four steps in the closing process:
1. Transfer the balance of the revenue account to the income summary account.
2. Transfer the expense account balances to the income summary account.
3.Transfer the balance of the income summary account to the owner's capital account.
4. Transfer the balance of the drawing account to the owner's capital account.
What are the four steps in the closing process?
1.Close the revenue account to income summary.
2. Close the expense account to income summary.
3. Close the Income Summary to Capital account.
4. Close the drawing account to Capital account.
What is the journal entry to close the drawing account?
Debit the Capital account
Credit the drawing account
How is the Income Summary Account Classified?
a temporary Owner's Equity account
After the closing entries are posted, which account normally has a balance other than zero?
The Capital account
After closing, which accounts have zero balances?
Revenue, drawing, and expense accounts
The business owner removes supplies that are worth $450 from the company stockroom. She intends to take them home for personal use. What effect will this have on the companies net income?
No effect on net income.
The seven steps of the accounting cycle are:
1. Analyze transactions
2. Journalize the transactions in the general journal.
3. Post the transactions in the journal ledger.
4. Prepare a worksheet.
5. Prepare financial statements.
6. Record adjusting entries.
7. Record closing entries.
8. Prepare a post-closing trial balance.
9. Interpret the financial information.
Post-closing trial balance
a statement that is prepared to prove the equality of total debits and credits. It is the last step in the end-of-period routine.
The post closing trial balance verifies that:
1. Total debits equal total credits.
2. Revenue, expense and drawing accounts have zero balances.
3. The only accounts with balances are the permanent accounts: assets, liabilities, and owner's equity.
Interpreting the financial statements means:
to understand and explain the meaning and importance of information in accounting reports.
What 4 questions does the information in financial statements answer?
What is the cash balance?
How much do customer's owe the business?
How much does the business owe suppliers?
What is the profit or loss?
Step 1 of the accounting cycle
Analyze transactions- Analyze source documents to determine their effects on the basic accounting equation. The data about transactions appears on a variety of source documents such as:
Step 2 of the accounting cycle
Journalize the transactions. Record the effects of the transactions in a journal.
Step 3 of the accounting cycle
Post the journal entries. Transfer data from the journal to the general ledger accounts.
Step 4 of the Accounting Cycle
Prepare a worksheet. At the end of each period, prepare a worksheet.
-Use the Trial Balance Section to prove the equality of debits and credits in the general ledger
-Use the Adjustments section to enter changes in account balances that are needed to present an accurate and complete picture of the financial affairs of the business.
-Use the Adjusted Trial Balance section to verify the equality of debits and credits after the adjustments. Extend the amounts from the Adjusted Trial Balance section to the Income Statement and Balance Sheet Sections.
-Use the Income Statement and Balance Sheet sections to prepare the financial statements.
Step 5 of the Accounting Cycle
Prepare financial statements. Prepare financial statements to report information to owner's, managers, and other interested parties.
-The income statement shows the results of operations for the period.
-The statement of owner's equity reports the changes in the owner's financial interest during the period.
-The balance sheet shows the financial position of the business at the end of the period.
Step 6 of the Accounting Cycle
Record adjusting entries. Use the worksheet to journalize and post adjusting entries. The adjusting entries are a permanent record of the changes in account balances shown on the worksheet.
Step 7 of the Accounting Cycle
Record closing entries. Journalize and post the closing entries to:
-Transfer net income or net loss to owner's equity
-Reduce the balances of the revenue, expense, and drawing accounts to zero.
Step 8 of the Accounting Cycle
Prepare a post-closing trial balance. The post-closing trial balance shows that the general ledger is in balance after the closing entries are posted. It is also used to verify that there are zero balances in revenue, expense, and drawing accounts.
Step 9 of the Accounting Cycle
Interpret the financial information. Use financial statements to understand and communicate financial information and to make decisions. Accountants, owners, managers, and other interested parties interpret financial statements by comparing such things as profit, revenue, and expenses from one accounting period to the next.
What accounts appear on the post-closing trial balance?
Assets, Liabilities, Owner's Capital
What are the last three steps in the accounting cycle?
Record closing entries
Prepare the post-closing trial balance
Interpret the financial statements
Why is post-closing trial balance prepared?
To make sure the debits and credits are balanced in the general ledger after adjusting and closing entries and also to make sure the balance is 0 for the Income, Expense, and Drawing accounts.
After the revenue and expense accounts are closed, Income Summary has a debit balance of $60,000. What does this figure represent?
Net loss of $60,000
Which account will not appear on the post closing trial balance?
Which financial statement would you find the answer to each question?
1. What were the total fees earned this month?
2. How much money is owed to suppliers?
3. Did the business make a profit?
4. Is there enough cash to purchase new equipment?
5. What were the expenses?
6. Do customers owe money to the business?
1. Income Statement
2. Balance Sheet
3. Income Statement
4. Balance Sheet
5. Income Statement
6. Balance Sheet
Is the following statement true or false? Why?- All owner's equity accounts appear on the post-closing trial balance.
False. The temporary owner's equity accounts do not appear on the post-closing trial balance. The temporary owner's equity accounts are the drawing account and the Income summary.
A firm has 56,000 dollars in revenue for the period. Give the entry to close the Fees Income account.
Debit the Fees Income account and credit the Income Summary account.
A firm has the following expenses: Rent expense, $3600; Salaries Expense, $7000; Supplies expense, $1500. Give the entry to close the expense accounts.
Credit the expense accounts and then Debit the Income Summary account.
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