Chapter 4: Completing the Accounting Cycle and Classifying Accounts Flashcards
(13 cards)
The Four-Step Closing Process
1) Close temporary accounts with credit balances (Revenue Accounts) to income summary statement.
2) Close temporary accounts with debit balances (Expense Accounts) to income summary statement.
3) Close Income Summary account to Owner’s Capital account.
4) Close Owner’s Withdrawals account to Owner’s Capital account.
Classified Balance Sheet
Organizes assets and liabilities into meaningful subgroups.
Current vs. Long-Term Classification
Current items are to be collected or owed within one year. Long-Term items are expected after one year.
Current Assets
Assets to be sold, collected or used within one year. (Cash, short-term investments, accounts receivable, merchandise inventory and prepaid expenses)
Long-Term Investments
Assets to be held for more than one year. (Notes receivable and long-term investments in stock and bonds)
Plant Assets
Tangible assets used to produce or sell products or services. (Equipment, machinery, buildings, and land used in operations)
Intangible Assets
Long term assets that lack physical form. (Patents, trademarks, copyrights, franchises and goodwill)
Current Liabilities
Liabilities to be paid or settled within one year. (Accounts payable, wages payable, taxes payable, interest payable, unearned revenues and current portions of notes or long-term debt)
Long-Term Liabilities
Liabilities not due within one year. (Notes payable, mortgages payable, bonds payable and lease obligations)
Equity
The owner’s claim on assets. For a proprietorship, this is the owners capital account.
Current Ratio
Current Liabilities
Used to evaluate a company’s ability to pay their current liabilities out of their current assets.
Quick Ratio
Current Liabilities
Debt to Equity Ratio
Total Equity
Used to determine whether a company is at higher risk of bankruptcy.
