College Accounting chapter 4

Classified balance sheet

a type of balance sheet that shows subsections for assets and liabilities

Current assets

cash and other assets that are expected to be converted to cash or sold or used up, usually within one year or less, through the normal operations of the business (notes receivable, accounts receivable, supplies, other prepaid expenses)

Notes receivable

a customer’s written promise to pay an amount and possibly interest at an agreed-upon rate; amounts that customers owe for which a formal, written instrument of credit has been issued

Property, plant, and equipment

long-term or relatively permanent tangible assets such as equipment, machinery, and buildings that are used in normal business operations (machinery, buildings, land)

Current liabilities

liabilities that will be due within a short time (usually one year or less) and that are to be paid out of current assets (notes payable, accounts payable, wages payable, interest payable, taxes payable, unearned fees)

Long-term liabilities

liabilities that will not be due for a long time (usually more than one year)

Permanent (real) accounts

term for balance sheet accounts because they are relatively permanent with balances that carry forward from year to year (Cash, Accounts Receivable, Equipment, Accumulated Depreciation, Accounts Payable, Common Stock Retained Earnings)

Temporary (nominal) accounts

term for income statement accounts because their balances relate to only one period and are not carried forward to the next period (revenues, expenses, dividends)

Closing entries

The journal entries that transfer the balances of temporary accounts to permanent accounts at the end of the accounting period

Closing process (closing the books)

the process of transferring the balances of temporary accounts to permanent accounts at the end of the accounting period

Closing process steps

• Revenue and expense account balances are transferred to the retained earnings account.

• The balance of the dividends account is transferred to the retained earnings account.

Closing entry steps

• Debit each revenue account for its balance, credit each expense account for its balance, and credit (net income) or debit (net loss) the retained earnings account.

• Debit the retained earnings account for the balance of the dividends account and credit the dividends account for its balance.

Accounting cycle

the accounting process that begins with analyzing and journalizing transactions and ends with the post-closing trial balance