Financial Accounting: Adjustments, Financial Statements, Closing Entries, and Merchandising Operations

Comprehensive vocabulary flashcards covering accrued expenses, financial statement preparation order, closing entries and the four-step closing process, and merchandising operations.

Accrued Expenses

Expenses that have been incurred but not yet paid or recorded through daily transaction journal entries, making them impractical to record on a daily basis (e.g., interest, salaries, and income tax).

Adjusted Trial Balance

A report prepared after all adjusting entries have been journalized and posted; it shows the balances of all accounts at the end of an accounting period to prove that total debit balances equal total credit balances.

Statement of Income

The financial statement prepared first in the accounting cycle, constructed using revenue and expense accounts.

Statement of Changes in Equity

The financial statement prepared second, using equity accounts and net income (loss) carried over from the Statement of Income.

Statement of Financial Position

The financial statement prepared third, using asset, liability, and equity accounts.

Temporary Accounts

Accounts that include revenues, expenses, and dividends declared (components of retained earnings) whose balances are reset to zero at the end of an accounting period.

Permanent Accounts

Statement of Financial Position accounts whose balances are not closed and carry forward into the future.

Closing Entries

Journal entries made at the end of an accounting period to transfer temporary account balances to retained earnings, producing a zero balance in temporary accounts for the next period.

Closing Revenue Accounts

The first step in the closing process: debit each revenue account for its balance and credit Income Summary for the total revenue earned.

Closing Expense Accounts

The second step in the closing process: debit Income Summary for total expenses and credit each individual expense account for its balance.

Closing Income Summary

The third step in the closing process: debit (or credit) Income Summary for the remaining balance in the account, and credit (or debit) Retained Earnings.

Closing Dividends Declared Accounts

The fourth step in the closing process: debit Retained Earnings and credit the Dividends Declared account for its balance.

Service Companies

Companies that perform services for customers as their primary source of revenue.

Merchandising Companies

Companies that buy and sell inventory rather than performing services (e.g., Walmart).

Retailers

Merchandising businesses that sell merchandise directly to consumers.

Wholesalers

Merchandising businesses that sell merchandise directly to retailers.

Manufacturers

Businesses that produce goods for sale to wholesalers or others.

Operating Cycle

The time it takes to go from cash to cash in producing revenues; it is longer for a merchandising company because merchandise must first be purchased, held in a store or warehouse, and then sold to customers.

Service Company Operating Cycle

The sequence in which a service business performs services for customers (for cash or on account), receives cash from customers who purchased on account, and pays cash to employees performing the service.

Merchandising Company Operating Cycle

The sequence in which a business purchases merchandise (for cash or on account), holds it in a store or warehouse, sells it to customers (for cash or on account), and collects cash from customers.

Accrued Expenses

Expenses that have been incurred but not yet paid or recorded through transaction journal entries (such as interest, salaries, and income tax).

Accrued Salaries

Salaries that result when employee services have been performed and an accounting period ends before the actual payment occurs.

Adjusted Trial Balance

A list prepared after all adjusting entries have been journalized and posted; it shows the balances of all accounts at the end of the accounting period and proves that total debit balances equal total credit balances.

Statement of Income

The financial statement prepared first in sequence, created using revenue and expense accounts.

Statement of Changes in Equity

The financial statement prepared second in sequence, created using equity accounts and net income (or loss) from the Statement of Income.

Statement of Financial Position

The financial statement prepared third in sequence, created using asset, liability, and equity accounts.

Temporary Accounts

Accounts that include revenue, expense, and drawings or dividends declared accounts whose balances are transferred to retained earnings at period end.

Permanent Accounts

Statement of financial position accounts that carry their balances forward into the future rather than being closed.

Closing Entries

Entries that transfer temporary account balances to retained earnings, producing a zero balance in temporary accounts to prepare them for the next period's activity.

Closing Revenue Accounts (Step 1)

Debit each revenue account for its balance and credit Income Summary for the total revenue earned.

Closing Expense Accounts (Step 2)

Debit Income Summary for the total expense amount and credit each expense account for its balance.

Closing Income Summary (Step 3)

Debit (or credit) Income Summary for the balance in the account and credit (or debit) Retained Earnings.

Closing Dividends Declared Account (Step 4)

Debit Retained Earnings and credit the dividends declared (or drawings) account for its balance.

Service Companies

Companies that perform services as their primary source of revenue.

Merchandising Companies

Companies that buy and sell inventory (or merchandise) as their primary business activity.

Retailers

Merchandising entities that sell merchandise directly to consumers.

Wholesalers

Merchandising entities that sell goods directly to retailers.

Manufacturers

Businesses that produce goods for sale to wholesalers or others.

Operating Cycle

The time it takes to go from cash to cash in producing revenues; it is longer for a merchandising company because merchandise must first be purchased, held in a store or warehouse, and then sold.