Questions and Answers
The accounting process is ______, meaning it repeats over time.
cyclical
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.
operational
Once the income statement is prepared, the temporary account balances are set back to ______.
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Closing entries are made at the end of the accounting ______.
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The purpose of closing entries is to set the balances of income statement accounts back to ______.
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The financial statements are the ______ of all that is done in the accounting cycle.
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Closing entries are recorded before the first transaction in the next ______ is recorded.
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The ______ statement is dedicated to showing net income and how it was determined.
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Revenue minus ______ equals Net Income.
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If the difference between revenue and expenses is positive, it results in a ______.
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The income statement summarizes revenue, expenses, and ______ information for a period of time.
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The precise time period covered is included in the headings of the income statement and the statement of ______.
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The ______ principle dictates that revenue and expenses should be reported in the same period.
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Financial statements must be produced on a regular basis, such as every month or ______.
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The accounting cycle consists of journalizing, posting to ledgers, and preparing the trial ______.
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Profit at the end of the accounting period is transferred into a new account called ______.
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The Retained Earnings account is only used for ______ entries.
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The retained earnings balance is considered as ______ profit.
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For the first month, the beginning retained earnings balance is ______ since there were no previous periods.
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Since Revenue - Expenses = ______, these balances move into Retained Earnings.
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The balances of Fees Earned and all expense accounts become ______ after closing entries are made.
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Closing entries must be posted to the ______ to impact the account balances.
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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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Description
This quiz focuses on the accounting cycle specific to service businesses using the cash basis method. Key concepts include financial statements, temporary accounts, and closing entries. Test your understanding of journalizing, ledgers, and trial balances essential for preparing accurate financial statements.
