Chapter 4 Accounting Closing Process and Balance Sheet Concepts

Vocabulary flashcards covering closing entries, temporary versus permanent accounts, liquidity, assets, liabilities, and the current ratio from Chapter 4.

Permanent Accounts

Accounts consisting of Assets, Liabilities, and Owner’s Capital whose balances carry forward and are the only accounts that appear on the post-closing trial balance.

Temporary Accounts

Accounts consisting of Owner’s Withdrawals, Revenues, and Expenses that are reset to zero during the closing process.

Closing Process

The accounting procedure of bringing temporary account balances to zero at the end of a period.

Liquidity

How quickly an item is converted to cash, used to order assets and liabilities on financial reports.

Current Assets

Assets that are expected to be converted to cash, sold, or used in the next $12$ months, such as cash, accounts receivable, and prepaid rent.

Long-term Assets

Assets that are not converted to cash or used up within the business cycle or a year.

Current Liabilities

Liabilities that must be paid with cash or goods/services within a year, such as accounts payable, accrued wages, and unearned revenue.

Long-term Liabilities

Liabilities that do not need to be paid within a year, such as note payable and mortgage.

Current Ratio

Current assets divided by current liabilities ($\frac{\text{Current Assets}}{\text{Current Liabilities}}$). A ratio lower than $1$ is unfavorable, and a ratio greater than $1$ is favorable.

Current Ratio Rule

The financial principle stating that for every $1$ dollar of current liabilities, there are dollars of current assets.

Post-closing Trial Balance

A trial balance or classified balance sheet produced after closing entries where only permanent accounts appear.

Closing Revenue

A closing process entry that debits revenue to close it and credits income summary with the total revenue.

Closing Expenses

A closing process entry that credits expenses to close it and debits income summary with the total expenses.

Closing Withdrawals

A closing process entry that credits withdrawals to close it and debits capital.

Closing Income Summary

A closing entry that uses debit and credit amounts from revenue and expense closing entries to determine net loss or income by subtracting the lower from the higher number; debits income summary and credits capital for net income, or credits income summary and debits capital for net loss.

Closing an account

Bringing it to zero