Question

1. Give an example of a real account.
2. Give an example of a nominal account.
3. Why are balance sheet accounts considered real and permanent?
4. Why are income statement accounts considered nominal and temporary?
5. Which account are dividends closed into?
6. How would the proceeds received from the advance sale of nonrefundable tickets for a theatrical performance be reported in the seller’s financial statements before the performance? A. Revenue for the entire proceeds.

B. Revenue to the extent of related costs expended.

C. Unearned revenue to the extent of related costs expended.

D. Unearned revenue for the entire proceeds.

7. Record the journal entry for the transaction above. Make up numbers.
8. An adjusting entry that records the earned portion of unearned revenue previously recorded always includes a
   1. A. Debit to an account in the asset category.
   2. B. Credit to an account in the asset category.
   3. C. Credit to an account in the equity category.
   4. D. Credit to an account in the liability category.
9. Record the journal entry for the transaction above. Make up numbers.
10. In reviewing a set of journal entries, an auditor encounters an entry composed of a debit to interest expense and a credit to interest payable. The purpose of this journal entry is to record A. An accrued expense. B. A deferred expense. C. A contingent liability. D. An unexpired cost.
11. Explain the above transaction in plain English.
12. Which common account can never appear in an adjusting entry?
13. Which two types of accounts (one or the other) must always appear in an adjusting entry?

Chapter 1

1. Name 5 of the 10 elements of financial statements.

Answer 1

Example of Real Account

Real account is account dealing with material asset like property. Real account does not close at the end of the period. It gets roll forward to next period. These are permanent accounts.

Golden Rule -

Debit what comes in

Credit what goes out

Example - Cash, Machinery, Furniture, etc.

Example of Nominal Account

Accounts which are related to expenses, losses, incomes or gains are called Nominal accounts. These accounts are closed at the end of each accounting year.

Golden rule -

Debit all expenses and losses

Credit all incomes and gains

Example - Salary, Interest, Commission

Why are balance sheet accounts considered real and permanent

In accounting, a permanent account refers to a general ledger account that is not closed at the end of an accounting year. The balance in a permanent account is carried forward to the subsequent year, where it becomes the beginning balance for the new year. Balance sheet accounts are also referred to as permanent or real accounts because at the end of the accounting year the balances in these accounts are not closed. Instead, the ending balances will be carried forward to become the beginning balances in the next accounting year.

Why are income statement accounts considered nominal and temporary

Income statement accounts are one of two types of general ledger accounts. (The other accounts in the general ledger are the balance sheet accounts).

Income statement accounts are used to sort and store transactions involving:

• Operating revenues
  • Operating expenses
• Non-operating revenues and gains
• Non-operating expenses and losses

Income statement accounts are also referred to as temporary accounts or nominal accounts because at the end of each accounting year their balances will be closed. This means that the balances in the income statement accounts will be combined and the net amount transferred to a balance sheet equity account. In the case of a corporation, the equity account is Retained Earnings. In the case of a sole proprietorship, the equity account is the owner's capital account. As a result, the income statement accounts will begin the next accounting year with zero balances.

Which account are dividends closed into

The account Dividends (or Cash Dividends Declared) is a temporary, stockholders' equity account that is debited for the amount of the dividends that a corporation declares on its capital stock. At the end of the accounting year, the balance in the Dividends account is closed by transferring the account balance to Retained Earnings. (Corporations could debit Retained Earnings directly when dividends are declared. In that case the Dividends account is not used.)

How would the proceeds received from the advance sale of nonrefundable tickets for a theatrical performance be reported in the seller’s financial statements before the performance

D. Unearned revenue for the entire proceeds.

Reason - D is corrent because per SFAC 5, revenue should not be recognized until earned. Revenues are generally earned when the product is delivered or services are rendered to customers. When a sale or cash receipt (or both) takes place prior to the delivery of the product or performance of the service, as in this case, the revenues should be earned as delivery/performance takes place. Since the entire proceeds in this problem are for the advance sale of tickets, they should be reported as unearned revenue in the seller’s financial statements before the performance.