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Copy of Chap004 1.doc
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Page 3
Chapter 04 - Adjustments, Financial Statements, and the Quality of Earnings
11. The closing entry is made at the end of the accounting period to (1) transfer the
balances in the temporary income statement accounts to retained earnings and (2)
reduce the revenue, gain, expense, and loss accounts to a zero balance so that
they can be used for the accumulation process during the next period.
A closing
entry must be entered into the system through the journal and posted to the ledger
accounts to state properly the temporary and permanent account balances (i.e.,
zero balances in the temporary accounts).
12.
(a)
Permanent accounts -- balance sheet accounts; that is, the asset, liability, and
stockholders’ equity accounts (these are not closed at the end of each period).
(b)
Temporary accounts -- income statement accounts; that is, revenues, gains,
expenses, and losses (these are closed at the end of each period).
(c)
Real accounts -- another name for permanent accounts.
(d)
Nominal accounts -- another name for temporary accounts.
13. The income statement accounts are closed at the end of the accounting period
because, in effect, they are temporary subaccounts to retained earnings (i.e., a part
of stockholders' equity).
They are used only for accumulation during the
accounting period.
When the period ends, these accumulated accounts must be
transferred (closed) to retained earnings. The closing process serves:
(1)
to correctly state retained earnings, and
(2)
to clear out the balances of the temporary accounts for the year just ended so
that these subaccounts can be used again during the next period for
accumulation and classification purposes.
Balance sheet accounts are not closed at the end of the period because they reflect
permanent accumulated balances of assets, liabilities, and stockholders' equity.
Permanent accounts show the entity's financial position at the end of the period and
are the beginning amounts for the next period.
14.
A post-closing trial balance is a listing taken from the ledger after the adjusting and
closing entries have been journalized and posted.
It is not a necessary part of the
accounting information processing cycle but it is useful because it demonstrates the
equality of the debits and credits in the ledger after the closing entry has been
journalized and posted and that all temporary accounts have zero balances.
4-3
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