Chapter 4 key terms

Accounting Cycle

Accounting Cycle

The process by which companies produce their financial statements for a specific period.

Classified Balance Sheet

A balance sheet that categorizes each asset and liability into specific groups.

Closing Entries

Entries that transfer revenues, expenses, and Dividends balances to the Retained Earnings account for the next period.

Closing Process

A step in the accounting cycle at the end of the period involving journalizing and posting closing entries to reset account balances to zero.

Current Asset

An asset expected to be converted to cash, sold, or used up within the next 12 months or the business's normal operating cycle.

Current Liability

A liability that must be settled with cash or goods/services within one year or the entity’s operating cycle.

Current Ratio

A measure of a company’s ability to pay current liabilities using current assets, calculated as Total current assets / Total current liabilities.

Income Summary

A temporary account that summarizes net income or loss for the period before transferring to Retained Earnings.

Intangible Asset

An asset without physical form that holds value due to special rights.

Liquidity

The ability of an asset to be quickly converted into cash.

Long-term Asset

An asset not expected to be converted to cash or used up within one year or the business’s operating cycle.

Long-term Investment

Investments in bonds or stocks intended to be held for longer than one year.

Long-term Liability

A liability that does not need to be paid within one year or the entity’s operating cycle.

Operating Cycle

The duration from cash payment for goods/services to cash collection from customers.

Permanent Account

An account that remains open at the end of the period, including assets, liabilities, Common Stock, and Retained Earnings.

Property, Plant, and Equipment

Long-lived, tangible assets like land, buildings, and equipment used in business operations.

Post-Closing Trial Balance

A list of accounts and their balances after closing entries, including only permanent accounts.

Reversing Entry

A journal entry that simplifies accounting for transactions in the next period, opposite of a prior adjusting entry.

Temporary Account

An account related to a specific accounting period that is closed at the end of that period, including revenues, expenses, Income Summary, and Dividends.