Chapter+4+Notes+-+Closing+Entries

Homework: SS2, SS3, SS4, SS5; BE4-2, BE4-5; E4-2(a)(b) Highlights: informal 10-column worksheets with adjustments; **temporary or nominal accounts** (revenues, expenses, drawings) which are closed into capital at the end of each period vs. **permanent or real accounts** (assets, liabilities, capital) which continue into subsequent period; **closing entries** (closing the accounts) refers to the process of closing revenues, expenses and drawings into capital account at end of period after adjustments; **post-closing trial balance** features permanent accounts (assets, liabilities, capital) only with updated capital figure (BC + R - E - DR = EC) as temporary accounts have already been brought to zero during closing procedures (click here for a link to the grade 11 accounting summary of closing entries)
 * __SO 1 - 3__**


 * __Summary of Closing Entries__**

31 Fees Earned dr 5000 ........ B. Gold, Capital cr 5000

31 B. Gold, Capital dr 2500 ........... Advertising Expense cr 500 ........... Rent Expense cr 2000

31 B. Gold, Capital dr 400 .......... B. Gold, Drawings cr 400

Homework: SS6, SS7; BE4-6, E4-4 Highlights: **summary of accounting cycle -> (1) business transactions occur, (2) transactions journalized, (3) journal entries posted [transferred] to individual ledger accounts, (4) unadjusted trial balance (a/l/c/d/r/e) prepared, (5) adjusting entries (prepayments, accruals, estimates) journalized and posted, (6) adjusted trial balance prepared, (7) financial statements (income statement, statement of owner's equity and balance sheet) prepared, (8) closing entries (r/e/d) journalized and posted, (9) post-closing trial balance (a/l/c) prepared**; worksheet and reversing entries (see note below) may also be prepared as part of accounting cycle; errors in journalizing and the use of correcting entries and reversing entries (see note below)
 * __SO 4 - 5__**

(1) Assume the bookkeeper erroneously recorded a **cash sale** as a **sale on account**
 * __Note on correcting entries and reversing entries__**

Accounts Receivable dr 500 Fees Earned cr 500
 * Incorrect entry recorded:**

Cash dr 500 -- Fees Earned cr 500
 * Correct entry not recorded:**

The error may be corrected with a **single correcting entry**:

Cash dr 500 --- Accounts Receivable cr 500
 * (a) Correcting entry:**

Alternatively, the error may be corrected with a **reversing entry** followed by the **correct entry**:

Fees Earned dr 500 Accounts Receivable cr 500
 * (a) Reversing entry:**

Cash dr 500 --- Fees Earned cr 500
 * (b) Correct entry:**

Homework: SS8, SS9; BE4-8, BE4-9; E4-7(a) (classified balance sheet only) Highlights: operating cycle (aka cash-conversion cycle) refers to the length of time a company takes to convert its inventory purchase to sales revenue (cash out - cash in)
 * __SO 6 - 7__**

- classified balance sheets contain (in order) current assets (consumed or converted to cash within one year), long-term investments, capital (fixed) assets, current liabilities (due within one year), long-term liabilities and owner's equity

- current assets (listed in order of liquidity) include cash and cash equivalents/short-term investments/marketable securities (treasury bills, commercial paper, GICs, money market funds, short-term holdings of shares and bonds of other companies), receivables (accounts, notes, interest), prepaid expenses (rent, insurance, licenses, supplies) and inventories (for merchandising firms only)

- long-term investments include long-term holdings of shares and bonds of other companies

- capital (fixed) assets (listed in order of permanency/longevity) include both (i) tangible assets such as property, plant and equipment, furniture and fixtures, automobiles, leasehold improvements and natural resources and (ii) intangible assets such as patents, copyrights, trademarks, goodwill and franchises; capital assets on the balance sheet are often followed by their respective accumulated depreciation or amortization contra account where applicable

- current liabilities (listed in order of due date) include payables (accounts, salaries, notes, interest, income taxes, sales taxes), unearned revenue (aka deferred revenue/income/credit) and current portions of long-term debt

- long-term liabilities include bonds, notes, bank loans, mortgages and lease obligations

- owner's equity includes one or more capital accounts for sole proprietorships or partnerships, or share capital/capital stock and retained earnings for corporations

- report form (top to bottom) vs. account form (left to right) balance sheets

- working capital (current assets minus current liabilities) and working capital ratio aka current ratio (current assets divided by current liabilities) measure company liquidity (ability to pay short-term debt)

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