U5: Completing the Accounting Cycle

Why is it that debits and credits are not enough that they are equal and that statements are mathematically done correct? 

They need to be accurate

What are adjustments? 

accounting changes recorded to ensure that all account balances are correct

What are prepaid expenses?

payments made in advance
(often at the beginning of the fiscal year)

If a company rents their building/office space, the landlord may require that rent be paid in…

Advance

Which accounts does both depreciation expense and accumulated depreciation increases? 

Depreciation expense: Debit 

Accumulated depreciation: Credit 

Fixed assets gain value overtime. T or F

False, they lose value overtime

We use depreciation to show…

Their decline in value

What is depreciation?

a method of spreading the cost of a
fixed asset over the life of that asset (the process of deducting the cost of an asset over its useful life)

assets _____ decrease overtime

gradually decreases overtime, not suddenly loses value!

What is depreciation expense?

Expense that records the using up of an asset for the current accounting period (found on Income statements, temporarily)

What is accumulated depreciation? 

the amount of depreciation recorded to date (found on B/S, permanent - grows as more depreciation occurs) Its a contra account as well!

The book value of an asset is the ____ cost minus the _______ ______

historical cost minus the accumulated depreciation!

A fixed % is charged every year to the book value (not the historic cost) at the beginning of the year. T or F?

True

What’s the difference between a declining balance and straight line?

Declining balance: depreciation that allocates a greater amount of depreciation to the early years of an asset’s life 

Straight line: provides equal depreciation expense each year

The process of reducing Rev & Exp accounts to zero is called…

Closing the books

When a new accounting period begins, the Rev & Exp accounts should show $0 balances so that they contain…

only data for the new period

under the Income Tax Act it is called…

Capital cost allowance

What’s the difference between temporary and permanent accounts?

• Temporary accounts → all Income Statement accounts: Revenue, Expense

Permanent accounts → all Assets, Liabilities, & Owner’s Equity accounts

Rev & Exp accounts are closed by

transferring their balances to a new account called Income Summary.

we must complete closing entries to update the…

capital account in the ledger

What is prepared after the closing entries?

Post-Closing Trial Balance. Contains only assets, liabilities, and capital accounts, not Rev & Exp. 

What are the two main purposes served by closing entries?

Rev & Exp accounts are prepared for the next accounting period 

And The Capital account is updated