quiz bank - Dr. M. D. Chase Long Beach State University...

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Unformatted text preview: Dr. M. D. Chase Long Beach State University Accounting 300A-10A The Operating Cycle: Worksheet/Closing Entries Page 1 THE WORKSHEET and CLOSING ENTRIES I. Review of Key Concepts and Terms: A. The purpose of the worksheet 1. To show that the accounts of the business are in balance (debits = credits ) and to provide, in one location, a systematic and comprehensive reconciliation of the accounts from trial balance to financial statements . The worksheet starts with pre-closing trial balance amounts adding adjusting, closing and reversing entries and produces a post closing trial balance from which the adjusted account balances are placed in the appropriate financial statements (i.e. balance sheet accounts are positioned on the balance sheet and income statement accounts on the income statement). 2. The worksheet is not a formal accounting record such as the journal or the ledger, rather it is a tool used to assist the accountant in the preparation of the Balance Sheet and Income Statement. The primary benefit of the worksheet lies in its ability to demonstrate that the accounts are in balance at the end of the period, through the adjusting process. By demonstrating that the accounts are in balance from the pre-closing trial balance through the adjusting and closing process to the post closing trial balance the worksheet greatly reduces the probability of errors in the financial statements. B. Closing Entries 1. Closing entries are those entries made at the end of the accounting period to close the nominal (income statement) accounts. Because the income statement measures income for a specific period, income statement accounts must start each measurement period with a zero balance. During the accounting period revenues and expenses are recorded in these accounts, and at the end of the period we can deduct the expenses incurred during the period from the revenues earned in order to determine the net income of the period. We call these expense and revenue accounts nominal or temporary because they have balances only during the accounting period and must be eliminated (reduced to zero balance) at the end of the period so that the next measurement period starts with zero balances. This process insures that only the revenues and expenses of a specific period are used to compute the net income of that period. C. The Closing Process Demonstrated 1. Consider the following facts for Shane and Co., CPA's: Revenues..................................... $ 500,000 Administrative expenses...................... 120,000 Rent ........................................ 80,000 Miscellaneous expenses....................... 25,000 Step 1. Close the revenue accounts to the expense and revenue summary....
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quiz bank - Dr. M. D. Chase Long Beach State University...

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