السبت، 26 مارس، 2016

Summarization chapter 4 - completing the accounting cycle


Summarization chapter 4 - completing the accounting cycle


Closing the Books

At the end of the accounting period, the company makes the accounts ready for the next period. This is called closing the books. In closing the books, the company distinguishes between temporary and permanent accounts.
Temporary accounts relate only to a given accounting period. They include all income statement accounts and the owner’s drawings account. The company closes all temporary accounts at the end of the period
In contrast, permanent accounts relate to one or more future accounting periods. They consist of all balance sheet accounts, including the owner’s capital account. Permanent accounts are not closed from period to period. Instead, the company carries forward the balances of permanent accounts into the next accounting period



Closing entries formally recognize in the ledger the transfer of net income
(or net loss) and owner’s drawings to owner’s capital. The owner’s equity statement
shows the results of these entries. Closing entries also produce a zero
balance in each temporary account. The temporary accounts are then ready to
accumulate data in the next accounting period separate from the data of prior
periods. Permanent accounts are not closed.

the following four entries accomplish the desired result more effi ciently:
1. Debit each revenue account for its balance, and credit Income Summary for total revenues.
2. Debit Income Summary for total expenses, and credit each expense account for its balance.
3. Debit Income Summary and credit Owner’s Capital for the amount of net income.
4. Debit Owner’s Capital for the balance in the Owner’s Drawings account, and credit Owner’s Drawings for the same amount.


Summary of the Accounting Cycle



The Classified Balance Sheet



Current Assets
Current assets are assets that a company expects to convert to cash or use up
within one year or its operating cycle, whichever is longer
The operating cycle of a company is the average time that it takes to purchase inventory,
sell it on account, and then collect cash from customers.
Long-Term Investments
Long-term investments are generally
 (1) investments in stocks and bonds of other companies that are normally held for many years,
 (2) long-term assets such as land or buildings that a company is not currently using in its operating activities,
(3) long-term notes receivable.

Property, Plant, and Equipment
Property, plant, and equipment are assets with relatively long useful lives that a company is currently using in operating the business. This category includes land, buildings, machinery and equipment, delivery equipment, and furniture.

Depreciation is the practice of allocating the cost of assets to a number of years. Companies do this by systematically assigning a portion of an asset’s cost as an expense each year (rather than expensing the full purchase price in the year of purchase). The assets that the company
depreciates are reported on the balance sheet at cost less accumulated depreciation. The accumulated depreciation account shows the total amount of depreciation that the company has expensed thus far in the asset’s life.
Intangible Assets
Many companies have long-lived assets that do not have physical substance yet
often are very valuable. We call these assets intangible assets. One signifi cant
intangible asset is goodwill. Others include patents, copyrights, and trademarks
or trade names that give the company exclusive right of use for a specifi ed
period of time

Long-Term Liabilities
Long-term liabilities are obligations that a company expects to pay after one
year. Liabilities in this category include bonds payable, mortgages payable, longterm
notes payable, lease liabilities, and pension liabilities. Many companies
report long-term debt maturing after one year as a single amount in the balance
sheet and show the details of the debt in notes that accompany the fi nancial statements.
Others list the various types of long-term liabilities.

Owner’s Equity
The content of the owner’s equity section varies with the form of business organization.
In a proprietorship, there is one capital account. In a partnership, there
is a capital account for each partner. Corporations divide owners’ equity into two
accounts—Common Stock (sometimes referred to as Capital Stock) and Retained
Earnings. Corporations record stockholders’ investments in the company by debiting
an asset account and crediting the Common Stock account. They record in
the Retained Earnings account income retained for use in the business. Corporations
combine the Common Stock and Retained Earnings accounts and report
them on the balance sheet as stockholders’ equity




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