Chapter 4 Completing the Accounting Cycle

Closing Process

Occurs at period-end after financial statements have been prepared. Resets revenue, expense, and withdrawals balances to zero.

Temporary accounts

Closed at period-end. They consist of revenue, expense, withdrawals, and Income Summary.

Permanent Accounts

Not closed at period-end. They consist of asset, liability, and owner capital (all balance sheet accounts)

Income Summary

A temporary account only used for the closing process that has a credit for total revenues and a debit for total expenses.

Post-closing Trial balance

A list of permanent accounts (assets, liabilities, equity) and their balances after all closing entries

Classified balance sheet

Organizes assets and liabilities into meaningful subgroups

Current vs long term classification

Current items are to be collected or owed within one year. Long-term items are expected after one year.

Current assets

Assets to be sold, collected or used within one year. (Cash, short-term investments in stocks and bonds)

Long-term investments

Assets to be held for more than one year. (Note receivable and long-term investments in stocks and bonds.)

Plant assets

Tangible assets used to produce or sell products and services. (equipment, machinery, building, and land)

Intangible Assetts

Long-term assets that lack physical form. (patents, trademark, copyrights, franchises, and goodwill)

Current Liabilities

Liabilities to be paid or settled within one year. (accounts payable, wages payable, taxes payable, interest payable, unearned revenues, current portions of notes or long-term debt)

Long-term Liabilities

Liabilities not due within one year. (notes payable, mortgages payable, bonds payable, and lease obligations)

Equity

The owner’s claim on assets. (For a proprietorship this is the owner’s capital account.)