Lecture 8

Question 1

What is the purpose of closing entries?

Answer 1

Closing entries serve the purpose of transferring the end of period balances in the income and expense accounts to the capital account so the capital/equity account represents the owners equity after adjusting for profit in the period

Question 2

Why are income, expenses and distributions closed off each period?

Answer 2

Theyre temporary accounts which start off at 0 each period

Question 3

What is the accounting process?

Answer 3

• analyse transactions to determine economic impact on the accounting equation (debit/credit)
• record external transactions in the journal
• transfer to the ledger
• prepare pre-adjustment trial balance
• process adjusting entries
• prepare post-adjustment trial balance
• prepare financial statements
• process closing entries

Question 4

What is a trial balance?

Answer 4

A listing of balances on all nominal ledger accounts

Question 5

What are the 2 types of trial balances?

Answer 5

Pre-adjustment & post adjustment trial balance

Question 6

What is the purpose of adjusting entries?

Answer 6

To ensure that the statement of profit & loss reports income earned, and expenses incurred during the period

Question 7

What is the procedure of closing the accounts?

Answer 7

Income & expenses balances are transferred to temporary “trading account” and “profit or loss account”

Then it’s transferred to the owners equity account on the balance sheet

Question 8

How is drawings transferred to the owners capital account?

Answer 8

Directly

Credited and balanced off to the balance sheet

Question 9

What happens to sales & cost of sales at the end of the period?

Answer 9

They’re closed off to the trading account

Sales account will be debited

Cost of sales will be credited

Question 10

What does the balance in the trading account represent?

Answer 10

Gross profit

The gross profit is then transferred to the profit & loss account

Debit trading account, credit profit & loss to give it an opening credit balance to represent income balance

Question 11

When income exceeds expenses, the profit or loss account will have a …. Balance

Answer 11

Credit

Representing a profit for the period

Question 12

When expenses exceed income, the profit or loss account will have a … balance

Answer 12

Debit

Representing a net loss for the period

Question 13

What happens to the balance of the profit & loss account?

Answer 13

It’s closed off to the owner’s capital account or retained earnings (both equity accounts)

Question 14

What type of account is the distributions account?

Answer 14

Debit account with a debit balance

Question 15

How do you close off the distributions account?

Answer 15

Zero it by crediting it
Debit it to the owner’s capital account