Podcast
Questions and Answers
Which of the following statements best describes the primary purpose of the closing process in accounting?
Which of the following statements best describes the primary purpose of the closing process in accounting?
- To prepare the financial statements for external auditors.
- To reconcile bank statements with the company's cash balance.
- To zero out all revenue and expense accounts, measuring each period's net income separately. (correct)
- To adjust the values of long-term assets to reflect their current market value.
Which of the following accounts is considered a temporary account that is closed at the end of an accounting period?
Which of the following accounts is considered a temporary account that is closed at the end of an accounting period?
- Common Stock
- Retained Earnings
- Land
- Service Revenue (correct)
Which type of accounts are NOT closed at the end of the accounting period?
Which type of accounts are NOT closed at the end of the accounting period?
- Dividend accounts
- Revenue accounts
- Asset accounts (correct)
- Expense accounts
The primary purpose of closing entries is to transfer the balances of revenues, expenses, and dividends to which of the following accounts?
The primary purpose of closing entries is to transfer the balances of revenues, expenses, and dividends to which of the following accounts?
What type of account is the 'Income Summary' account?
What type of account is the 'Income Summary' account?
Before closing entries, an Income Summary account has a debit balance. What does this indicate about the company's financial performance?
Before closing entries, an Income Summary account has a debit balance. What does this indicate about the company's financial performance?
Which journal entry accurately reflects the closing of expense accounts at the end of the accounting period?
Which journal entry accurately reflects the closing of expense accounts at the end of the accounting period?
Which of the following statements is correct regarding the closing of the dividend account?
Which of the following statements is correct regarding the closing of the dividend account?
After revenues and expenses are closed, what should the balance in the Income Summary account represent?
After revenues and expenses are closed, what should the balance in the Income Summary account represent?
If a company has a net loss for the period, how is the Income Summary account closed?
If a company has a net loss for the period, how is the Income Summary account closed?
What is the purpose of preparing a post-closing trial balance?
What is the purpose of preparing a post-closing trial balance?
Which type of accounts are included in a post-closing trial balance?
Which type of accounts are included in a post-closing trial balance?
How does journalizing and posting closing entries affect the accounting cycle?
How does journalizing and posting closing entries affect the accounting cycle?
Which of the following is the correct formula for calculating the current ratio?
Which of the following is the correct formula for calculating the current ratio?
What does an increasing current ratio typically suggest about a company's financial health?
What does an increasing current ratio typically suggest about a company's financial health?
Which accounts are used for the closing entries of a service company?
Which accounts are used for the closing entries of a service company?
A company's revenue accounts have a total credit balance of $50,000. To close these accounts, which of the following entries is required?
A company's revenue accounts have a total credit balance of $50,000. To close these accounts, which of the following entries is required?
What is the correct order of closing entries?
What is the correct order of closing entries?
How are expense accounts closed during the closing process?
How are expense accounts closed during the closing process?
A company's Income Summary has a credit balance of $20,000 after revenues and expenses are closed. To close the Income Summary account, which entry is made?
A company's Income Summary has a credit balance of $20,000 after revenues and expenses are closed. To close the Income Summary account, which entry is made?
What is the impact on the accounting equation (Assets = Liabilities + Equity) when closing entries are correctly performed?
What is the impact on the accounting equation (Assets = Liabilities + Equity) when closing entries are correctly performed?
The primary objective of closing entries includes which of the following tasks?
The primary objective of closing entries includes which of the following tasks?
After the closing entries have been completed, the post-closing trial balance would NOT include which of the following accounts?
After the closing entries have been completed, the post-closing trial balance would NOT include which of the following accounts?
On December 31, a company's adjusted trial balance shows a debit balance in Income Summary. What does this imply?
On December 31, a company's adjusted trial balance shows a debit balance in Income Summary. What does this imply?
If a company erroneously fails to close its revenue accounts at year-end, what is the likely impact on its financial statements?
If a company erroneously fails to close its revenue accounts at year-end, what is the likely impact on its financial statements?
A company has current assets of $150,000 and current liabilities of $75,000. What is the current ratio?
A company has current assets of $150,000 and current liabilities of $75,000. What is the current ratio?
A company's current ratio increased from 1.5 to 2.5. What does this change indicate about the company's ability to meet its short-term obligations?
A company's current ratio increased from 1.5 to 2.5. What does this change indicate about the company's ability to meet its short-term obligations?
What is the correct journal entry to close the dividends account at the end of an accounting period?
What is the correct journal entry to close the dividends account at the end of an accounting period?
A company reports total revenues of $300,000 and total expenses of $200,000. The dividends paid during the year were $40,000. If the beginning Retained Earnings balance was $50,000, what is the ending Retained Earnings balance after closing entries are posted?
A company reports total revenues of $300,000 and total expenses of $200,000. The dividends paid during the year were $40,000. If the beginning Retained Earnings balance was $50,000, what is the ending Retained Earnings balance after closing entries are posted?
Which of the following steps is NOT a part of the closing process?
Which of the following steps is NOT a part of the closing process?
A company has a net loss of $5,000. What is the correct entry to close the Income Summary?
A company has a net loss of $5,000. What is the correct entry to close the Income Summary?
A company's current assets are $200,000 and current liabilities are $100,000. If the company pays $20,000 of its accounts payable with cash, what is the new current ratio?
A company's current assets are $200,000 and current liabilities are $100,000. If the company pays $20,000 of its accounts payable with cash, what is the new current ratio?
What kind of errors can a post-closing trial balance help to detect?
What kind of errors can a post-closing trial balance help to detect?
Which of the following accounts would NOT appear on a post-closing trial balance?
Which of the following accounts would NOT appear on a post-closing trial balance?
Flashcards
Closing Process
Closing Process
The process that zeroes out revenue and expense accounts to measure each period's net income separately.
Temporary Accounts
Temporary Accounts
Accounts related to a specific accounting period, closed at the end (Revenues, Expenses, Income Summary, Dividends).
Permanent Accounts
Permanent Accounts
Accounts not closed at the end of the period (Assets, Liabilities, Common Stock, Retained Earnings).
Closing Entries
Closing Entries
Signup and view all the flashcards
Income Summary
Income Summary
Signup and view all the flashcards
Post-Closing Trial Balance
Post-Closing Trial Balance
Signup and view all the flashcards
Current Ratio
Current Ratio
Signup and view all the flashcards
How to Compute Current Ratio
How to Compute Current Ratio
Signup and view all the flashcards
Accounting Cycle
Accounting Cycle
Signup and view all the flashcards
Study Notes
- The purpose of closing entries is to explain how to journalize and post them.
Closing Process
- The closing process zeroes out revenue and expense accounts
- The goal is to measure each period's net income separately
- Temporary accounts relate to a specific accounting period and are closed at the end of that period
- Temporary accounts include revenues, expenses, Income Summary, and Dividends accounts
- Permanent accounts are NOT closed at the end of the period
- Permanent accounts include: Asset, Liability, Common Stock, and Retained Earnings accounts
- Closing entries transfer revenues, expenses, and Dividends to Retained Earnings
- Revenues and expenses can be transferred first to an Income Summary account
- Income Summary is a temporary account that summarizes the net income (or net loss) for the period
Closing Temporary Accounts: Revenues
- Service Revenue is debited $17,500
- Income Summary is credited $17,500
- The purpose is to close revenue.
Closing Temporary Accounts: Expenses
- Income Summary is debited $8,950
- Rent Expense is credited $3,000
- Salaries Expense is credited $4,800
- Supplies Expense is credited $400
- Utilities Expense is credited $100
- Depreciation Expense-Building is credited $250
- Depreciation Expense—Furniture is credited $300
- Interest Expense is credited $100
- The purpose is to close expenses
Closing Temporary Accounts: Income Summary
- Income Summary is debited $8,550
- Retained Earnings credited $8,550
- The purpose is to close Income Summary
Closing Temporary Accounts: Dividends
- Retained Earnings is debited $5,000
- Dividends is credited $5,000
- The purpose is to close Dividends.
Net Loss Scenario
- If a business has a net loss, the Income Summary would have a debit balance
- Retained Earnings is debited $2,000
- Income Summary is credited $2,000
- To close Income Summary
Closing Temporary Accounts: Summary
- Service Revenue is debited $17,500
- Income Summary is credited $17,500
- To close revenue
- Income Summary is debited $8,950
- Rent Expense is credited $3,000
- Salaries Expense is credited $4,800
- Supplies Expense is credited $400
- Utilities Expense is credited $100
- Depreciation Expense-Building is credited $250
- Depreciation Expense—Furniture is credited $300
- Interest Expense is credited $100
- To close expenses
- Income Summary is debited $8,550
- Retained Earnings is credited $8,550
- To close Income Summary.
- Retained Earnings is debited $5,000
- Dividends is credited $5,000
- To close Dividends.
Post-Closing Trial Balance
- Accounting cycle ends with a post-closing trial balance
- A list of the accounts with their balances at the end of the period, after journalizing and posting the closing entries
- Includes only permanent accounts
Evaluating Business Performance with the Current Ratio
- The current ratio measures a company's ability to pay its current liabilities with its current assets.
- Current ratio = Total current assets / Total current liabilities
- A company prefers to have a high current ratio
- Increases in current ratio indicate improvement in ability to pay debts
Example of Accounting Cycle Steps
- Account balances
- Analyze and Journalize Transactions
- Post to Ledger
- Prepare Unadjusted Trial Balance
- Adjusting Entries
- Prepare Worksheet
- Prepare Adjusted Trial Balance
- Prepare Financial Statements
- Closing Entries
- Prepare Post-closing Trial Balance
Studying That Suits You
Use AI to generate personalized quizzes and flashcards to suit your learning preferences.
