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Questions and Answers
Temporary accounts include assets, expenses, and the owner's drawing account.
False
Temporary accounts are also called nominal accounts.
True
Journal entries used to prepare temporary accounts for a new fiscal period are closing entries.
True
The balances of the liability accounts must be reduced to zero to prepare the accounts for the next period.
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Permanent accounts are used to accumulate information until it is transferred to the owner's capital account.
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The capital account's new balance after all closing entries are posted is verified by checking it with the amount of capital shown on the balance sheet at the end of the fiscal period.
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The ending account balances of permanent accounts for one fiscal period are the beginning account balances for the next fiscal period.
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The Income Summary account has a normal debit balance.
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A post-closing trial balance verifies the equality of debits and credits in a general ledger after the closing entries are posted.
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To close a temporary account, an amount equal to its balance is recorded in the account on the side opposite to its balance.
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The series of accounting activities included in recording financial information for a fiscal period is called an accounting cycle.
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The drawing account is a permanent account.
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Temporary accounts must start each fiscal period with a zero balance.
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At the end of a fiscal period, the balances of permanent accounts are summarized and transferred to the owner's capital account.
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Study Notes
Accounting Concepts and Practices
- Temporary accounts consist of revenue, expenses, and the owner's drawing account, which do not include assets.
- Nominal accounts are another name for temporary accounts, indicating their nature of holding balances for a limited time.
- Closing entries are journal entries made to reset temporary accounts for the new fiscal period, preparing for the next accounting cycle.
- Liability accounts do not need to be zeroed out for the next fiscal period, contrary to some beliefs.
- Permanent accounts are used consistently as they track cumulative financial information until transferred to the capital account.
- The new balance of the capital account post-closing entries should match the amount listed on the balance sheet at the end of the fiscal period for verification.
- The ending balances of permanent accounts at the end of one fiscal period are the starting balances at the beginning of the next period, maintaining continuity.
- The Income Summary account usually has a normal credit balance, not a debit balance, which is a common misconception.
- A post-closing trial balance ensures that total debits equal total credits in the ledger after closing entries, confirming accuracy.
- Closing a temporary account involves recording an opposite entry equal to its balance, effectively resetting it.
- The accounting cycle is the comprehensive process of recording financial information throughout a fiscal period, encompassing various accounting activities.
- The drawing account is classified as a temporary account, not a permanent one, as it resets each fiscal period.
- Temporary accounts must begin each fiscal period with a zero balance to accurately track financial performance.
- Permanent accounts' balances are not transferred to the owner's capital account at the fiscal period's end, maintaining their status for future periods.
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Description
This quiz covers key accounting concepts and practices from Chapter 8, including the identification of temporary and nominal accounts and the purpose of closing entries. Test your understanding of these fundamental accounting principles through flashcards designed to reinforce your knowledge.
