Section 7 - From the Unadjusted Trial Balance to Financial Statements Flashcards Preview

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Flashcards in Section 7 - From the Unadjusted Trial Balance to Financial Statements Deck (17)
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1

The adjusted trial balance is prepared after the books have been closed?

 

True or False

False.

 

The adjusted trial balance is prepared after the unadjusted trial balance, and before the financial statements are prepared.

 

The post-closing TB is prepared after the books have been closed.

2

Adjusting entries make expense and revenue accounts current as of the ____ date.

Cutoff

3

What does it mean when the Trial Balance (TB) is in balance?

Total debits equal total credits

 

By debits equaling credits, this means no unbalanced journal entries have been recorded, adhering to the double-entry principle illustrated by Pacioli in 1494. If there were an unbalance, it would be impossible to generate accurate financial statements. Please note, however, even when the total debits and credits equal, there may still be errors.

4

In a company's chart of accounts, Asset accounts generally start with the number ___

1

5

What is the order of a company's chart of accounts?

Assets, Liabilities, Owners Equity, Revenue, Expenses

(ALOE RE)

6

What is the primary purpose of the Trial Balance (TB)?

When dealing with numbers, it is inevitable that errors might’ve occurred during the accounting cycle. At any time during the period, a company can run a 'trial balance.' A trial balance (TB) is an internal report which can be prepared manually, but with the use of accounting software, the internal report is printed with the titles of all accounts in the general ledger with an ending balance; generally, accounts with a zero balance are excluded.

The primary purpose of the TB is to detect errors if any. When prepared, a specific format is followed. To the right of the account titles listed, there are two columns; one column is presented with the header "Debit" which lists all accounts with a debit ending balance, and the other column has the header "Credit" for all accounts with a credit ending balance. After all account balances have been transferred to the TB, each column is summed, and the totals in the debit column should be equal to those in the credit column.

By debits equaling credits, this means no unbalanced journal entries have been recorded, adhering to the double-entry principle illustrated by Pacioli in 1494. If there were an unbalance, it would be impossible to generate accurate financial statements. Please note, however, even when the total debits and credits equal, there may still be errors.

7

In a company's chart of accounts, Owner's Equity accounts generally start with the number ___

3

8

Assets, Liabilities and Owner's Equity accounts make up the Income Statement.

 

True or False

False.

 

The Revenue and Expense accounts make up the Income Statement.

9

What is the normal balance of an expense account?

Debit (ALL expense accounts are increased with a debit)

 

The normal balance is the side on which an increase is shown.

10

The post-closing trial balance only includes the Balance Sheet accounts.

 

True or False

True.

 

After the books have been closed, the final TB, the post-closing, is prepared. This trial balance only includes the balance sheet accounts Assets, Liabilities, Owner's Equity (ALOE) as all other temporary accounts, Revenue and Expenses (RE) have been closed.

11

If total debits equal credits, that means no errors have occurred.

 

True or False

False.

 

Although total debits and credits tie, there might still be errors. For example, it a company paid insurance expense of $200 but mistakenly debited Insurance expense and credited cash for $150, total debits and credits still tie despite the $50 error in the Insurance expense account.

12

What is the purpose of closing the books?

The process of ‘closing the books’ is necessary to reduce the balance in the temporary accounts (Revenue and Expenses) to zero. In addition to the temporary accounts, the Owner’s Equity withdrawal account is closed.

 

As a helpful tip to remember which accounts need to be closed (zero balance) at the end of a period, think of the RED accounts (Revenue, Expenses, Drawings)

13

Adjusting entries are required for companies that use the ____ basis of accounting

Accrual

14

The Balance sheet is also called the Profit and Loss statement

 

True or False

False.

The Income Statement is also referred to as the Profit and Loss. The Income statement records the revenues earned and expenses incurred by a company for a specific period of time, whether it be a month, 3 months, or year.

15

Before financial statements can be prepared, the post-closing trial balance must be prepared first.

 

True or False

False.

The Adjusted TB must be prepared before the financial statements are prepared.

Adjusting entries are a critical step in the 9-step accounting cycle. As mentioned, financial statements should not be issued unless certain adjustments and updates have been made. Failure to do so would misrepresent the financial health of a company as balances are not accurate. The purpose of making adjusting entries is to update the books for accruals and deferrals and/ or other events that have occurred but have not yet been recorded.

16

What is the normal balance for Accounts Payable?

Credit (ALL liability accounts are increased with a credit)

 

The normal balance is the side on which an increase is shown.

17

Which accounts make up the Balance Sheet?

Assets, Liabilities, Owner's Equity (ALOE)

 

As a helpful aid to remember which accounts appear on the Balance Sheet, think of "ALOE vera," a popular medicinal plant with many benefits and often helps to balance out the body.