Ch 4 - Completing the Accounting Cycle

ACC 101

worksheet

a multiple-column form that may be used in making adjustments and in preparing financial statements

keying

a different letter identifies the debit and credit for each adjusting entry

closing entries

entries made at the end of an accounting period to transfer the balances of temporary accounts to a permanent stockholders’ equity account, Retained Earnings

temporary accounts

accounts that relate only to a given accounting period

• sometimes called nominal accounts

• consist of all income statement accounts, the Dividends account, and the Income Summary account

• closed at the end of the accounting period

permanent accounts

accounts that relate to one or more future accounting periods

• sometimes called real accounts

• consist of all balance sheet accounts, including stockholders’ equity accounts

• not closed from period to period

income summary

a temporary account used in closing revenue and expense accounts

post-closing trial balance

a list of permanent accounts and their balances after a company has journalized and posted closing entries

reversing entry

an entry made at the beginning of the next accounting period that is the exact opposite of the adjusting entry made in the previous period

classified balance sheet

a balance sheet that contains standard classifications or sections

current assets

assets that a company expects to convert to cash or use up within one year or its operating cycle, whichever is longer

• e.g., Cash, Investments (such as short-term U.S. government securities), Receivables (accounts receivable, notes receivable, and interest receivable), Inventories, Prepaid expenses (insurance and supplies)

operating cycle

the average time that it takes to purchase inventory, sell it on account, and then collect cash from customers (the average time required to go from cash to cash in producing revenue)

long-term investments

Generally, (1) investments in stocks and bonds of other companies that are normally held for many years; (2) long-term assets, such as land and buildings, not currently being used in operating activities; and (3) long-term notes receivable

property, plant, and equipment

assets with relatively long useful lives that are currently being used in operations

• sometimes called fixed assets or plant assets

• e.g., land, buildings, equipment, delivery vehicles, and furniture

depreciation

the practice of allocating the cost of assets to a number of years

accumulated depreciation

the total amount of depreciation that the company has expensed thus far in the asset’s life

intangible assets

long-lived assets that do not have physical substance (yet often are very valuable)

• e.g., goodwill, patents, copyrights, and trademarks or trade names that give the company exclusive right of use for a specified period of time

current liabilities

obligations that a company expects to pay within the coming year or its operating cycle, whichever is longer

• e.g., accounts payable, salaries and wages payable, notes payable, interest payable, and income taxes payable (also includes current maturities of long-term obligations)

liquidity

the ability of a company to pay obligations expected to be due within the next year

long-term liabilities

obligations that a company expects to pay after one year

• e.g., bonds payable, mortgages payable, long-term notes payable, lease liabilities, and pension liabilities

stockholders’ equity

the ownership claim of shareholders on total assets

• it is to a corporation what owner’s equity is to a proprietorship