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Questions and Answers
The accounting process is ______, meaning it repeats over time.
The accounting process is ______, meaning it repeats over time.
cyclical
Financial statements are typically prepared on the last day of the ______.
Financial statements are typically prepared on the last day of the ______.
cycle
Temporary accounts are used to record ______ transactions for a specific period of time.
Temporary accounts are used to record ______ transactions for a specific period of time.
operational
Once the income statement is prepared, the temporary account balances are set back to ______.
Once the income statement is prepared, the temporary account balances are set back to ______.
Closing entries are made at the end of the accounting ______.
Closing entries are made at the end of the accounting ______.
The purpose of closing entries is to set the balances of income statement accounts back to ______.
The purpose of closing entries is to set the balances of income statement accounts back to ______.
The financial statements are the ______ of all that is done in the accounting cycle.
The financial statements are the ______ of all that is done in the accounting cycle.
Closing entries are recorded before the first transaction in the next ______ is recorded.
Closing entries are recorded before the first transaction in the next ______ is recorded.
The ______ statement is dedicated to showing net income and how it was determined.
The ______ statement is dedicated to showing net income and how it was determined.
Revenue minus ______ equals Net Income.
Revenue minus ______ equals Net Income.
If the difference between revenue and expenses is positive, it results in a ______.
If the difference between revenue and expenses is positive, it results in a ______.
The income statement summarizes revenue, expenses, and ______ information for a period of time.
The income statement summarizes revenue, expenses, and ______ information for a period of time.
The precise time period covered is included in the headings of the income statement and the statement of ______.
The precise time period covered is included in the headings of the income statement and the statement of ______.
The ______ principle dictates that revenue and expenses should be reported in the same period.
The ______ principle dictates that revenue and expenses should be reported in the same period.
Financial statements must be produced on a regular basis, such as every month or ______.
Financial statements must be produced on a regular basis, such as every month or ______.
The accounting cycle consists of journalizing, posting to ledgers, and preparing the trial ______.
The accounting cycle consists of journalizing, posting to ledgers, and preparing the trial ______.
Profit at the end of the accounting period is transferred into a new account called ______.
Profit at the end of the accounting period is transferred into a new account called ______.
The Retained Earnings account is only used for ______ entries.
The Retained Earnings account is only used for ______ entries.
The retained earnings balance is considered as ______ profit.
The retained earnings balance is considered as ______ profit.
For the first month, the beginning retained earnings balance is ______ since there were no previous periods.
For the first month, the beginning retained earnings balance is ______ since there were no previous periods.
Since Revenue - Expenses = ______, these balances move into Retained Earnings.
Since Revenue - Expenses = ______, these balances move into Retained Earnings.
The balances of Fees Earned and all expense accounts become ______ after closing entries are made.
The balances of Fees Earned and all expense accounts become ______ after closing entries are made.
Closing entries must be posted to the ______ to impact the account balances.
Closing entries must be posted to the ______ to impact the account balances.
The first closing entry is journalized right after the last ______ entry.
The first closing entry is journalized right after the last ______ entry.
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Study Notes
Financial Statements
- Financial statements are generated from journal entries, ledger postings, and trial balances.
- Time period concept mandates regular financial statement preparation, typically monthly or annually.
- Most values in financial statements are derived directly from the trial balance, with necessary calculations displayed.
Income Statement
- The income statement summarizes revenue, expenses, and net income for a specific time frame.
- Key Equation: Revenue – Expenses = Net Income (or Net Loss).
- Revenue is presented first, followed by total expenses, with positive differences indicating profit and negative differences (shown in parentheses) indicating a net loss.
- It provides a crucial overview of a business's profitability during a defined period, adhering to the matching principle to reflect only relevant revenues and expenses.
The Accounting Cycle
- Accounting operates on the time period assumption, dividing a business's activities into distinct reporting periods.
- The accounting cycle is repetitive, typically spanning a month, quarter, or year.
- Daily journalizing and posting of transactions occur, while financial statements are prepared at the end of the cycle.
- Upon completion of the cycle, the process resumes for the next period, consistently aiming for financial statement preparation.
Temporary Accounts
- Accounts on the income statement are classified as temporary accounts, recording operational transactions for limited periods.
- Temporary account balances are reset to zero after the income statement is prepared, ready for the next accounting period.
Closing Entries
- Special journal entries are made at the end of the accounting period to reset income statement accounts to zero.
- Closing entries are crucial for transitioning financial information to the next accounting cycle without carrying over prior balances.
- Profit at the conclusion of a period is transferred to the Retained Earnings account, which accumulates all net income generated since the business started.
- Closing entries involve moving balances from revenue and expense accounts into Retained Earnings, reflecting cumulative profit rather than resetting the retained earnings account itself.
Example of Closing Entries
- In the first accounting month, retained earnings start at zero. At month-end, its balance equals that month's net income.
- Subsequent months see the additional net income added to the existing retained earnings balance.
- Closing entries are recorded in the same journal as general entries and must be posted to ledgers to update account balances accurately.
Practical Example
- Given Fees Earned as $2,100 (credit) and Rent Expense as $500 (debit), the net income calculates to $1,600.
- The specific process for closing entries would follow the established guidelines to ensure accurate ledger updates.
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