Question

Module II: Chapter 4: Review Questions Assignment 1. What are the steps in recording closing entries? What are the steps in the accounting cycle? 2. What accounts are affected by closing entries? What accounts are not affected? 3. What two purposes are accomplished by recording closing entries? 4. What is the purpose of the Income Summary account? 5. Explain whether an error has occurred if a post-closing trial balance includes a Depreciation Expense account. 6. What tasks are aided by a work sheet? 7. Why are the debit and credit entries in the Adjustments column of the work sheet identified with letters? 8. What is a company's operating cycle? 9. What classes of assets and liabilities are shown on a typical classified balance sheet? 10. How is unearned revenue classified on the balance sheet?

Answer 1

1. Steps in recording closing entries

· Close revenue and income accounts to Income summary

· Close expenses account to income summary

· Close net income or loss to Retained earnings

· Close dividend to Retained earnings

Steps in accounting cycle

· Identify transactions

· Record transactions in journal

· Posting

· Unadjusted Trial balance

· Worksheet

· Adjusting Journal entries

· Financial statements

· Closing the books

2. The closing accounts affected in closing process are nominal accounts that is income and expenses account and dividend account. The real accounts the assets, liabilities and equity are not affected in closing process.

3. Two purpose accomplished by closing entries

· Temporary accounts are closed to zero on the general ledger

· It helps in preparing final trial balance

4. The purpose of Income summary account is to facilitate closure of income and expenses account for a given accounting period

5. Yes there is an error, Depreciation is a nominal account and hence expense account. It should be closed to Income summary account as part of closing entries

6. Worksheet helps in identifying the adjusting entries. For example: Rent outstanding, expiry of prepaid rent. It helps in ensuring debits are equal to credits

7. The letters correspond to the adjusting entries. It helps in reconciling debit with credit and ensuring final Trial balance is matching

8. The operating cycle refers to the average period required for a business to purchase of good and raw materials, sell the goods to its customers and receive the cash from the customers for the sale of goods.

9. Assets includes – Current assets, Long term investments, Property, Plant and Equipment, Intangibles

Liabilities – Current Liabilities and Long term- Liabilities

10. Unearned revenue is part of Current liabilities.