Accounting 101: Chapter 4 Accounting Cycle

Accounting Cycle

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

Closing entries

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

closing process

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

Closing the books

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

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

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

Current ratio

A financial ratio that expresses the relationship between current assets and current liabilities, computed by dividing current assets by current liabilities

Fixed (plant) assets

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

Liquidity

A company’s ability to convert assets into cash

Long-term liabilities

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

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

Permanent (real) accounts

Term for balance sheet accounts because they are relatively permanent with balances that carry forward from year to year

Property, plant, and equipment

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

Reversing entries

Journal entries that are recorded on the first day of the next period that are the exact opposite of the related adjusting entry from the last day of the prior period

Solvency

The ability of a firm to pay its debts as they come due

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

Working capital

The excess of the current assets of a business over its current liabilities