Chapter 4: Learning Objectives

Question 1

Describe the closing process and explain why temporary accounts are closed each period.

Answer 1

The closing process is the final step of the accounting cycle.

It closes temporary accounts at the end of each accounting period:
(1) to update the owner’s capital account for revenue, expense, and withdrawals transactions recorded for the period,
(2) and to prepare revenue expense, and withdrawals accounts for the next reporting period by giving them zero balances.

Question 2

Prepare closing entries.

Answer 2

Closing entries involve four steps:
(1) Close credit balances in revenue accounts to Income Summary
(2) Close debit balances in expense accounts to Income Summary
(3) Close Income Summary to Owner’s Capital
(4) Close the Withdrawals account to Owner’s Capital

Question 3

Explain and prepare a post-closing trial balance.

Answer 3

A post-closing trial balance is a list of permanent accounts and their balances after all closing entries are journalized and posted. Permanent accounts are asset, liability, and equity accounts.

The purpose of a post-closing trial balance is to verify that
(1) total debits equal total credits for permanent accounts
(2) all temporary accounts have zero balances

Question 4

Complete the steps in the accounting cycle.

Answer 4

The accounting cycle consists of nine steps:
(1) analyze transactions
(2) journalize
(3) post
(4) prepare unadjusted trial balance
(5) adjust
(6) prepare adjusted trial balance
(7) prepare statements
(8) close
(9) prepare post-closing trial balance. If a work sheet is prepared, it covers Steps 4 to 6. Reversing entries are an optional step that is done between Steps 9 and 1.