ACCT 201 Name : Thomas Termote

Chapter 4
In-class exercise

1. Explain the closing process:

A closing entry is a journal entry made at the end of the accounting period. It involves
shifting data from temporary accounts on the income statement to permanent
accounts on the balance sheet. All income statement balances are eventually
transferred to retained earnings.

2. Explain temporary accounts:

- Relates to one accounting period

- All income statement accounts and withdrawal account are temporary account
- They are temporary because they are uses and reset to zero
- Income Summary account is created and used for closing process. It is temporary
account

3. Explain permanent accounts:

- Reports activities of related account to one or more future accounting period

- Permanent accounts are not closed in each period
- They carry their ending balances to the future periods
- Asset, Liabilities and Capital accounts are permanent account

4. Write 4 steps in the closing process.

Step 1 : Close Credit Balances in Revenue Accounts to Income Summary

Step 2 : Close Debit Balances in Expense accounts to Income Summary

Step 3 : Close Income Summary account to Owner’s Capital

Step 4 : Close Withdrawal to Owner’s Capital

5. A classify balance organizes assets and liabilities into subgroups that provide more
information to decision makers.
 a. Examples:
6. Current asset are cash and other resources that are expected to be to come due
(collected) within one year or the company’s operating cycle, whichever is longer.
Examples are cash, short-term investments, accounts receivable, short-term notes
receivable, goods for sale (called merchandise or inventory), and prepaid expenses.
7. Long term investments are expected to be held for more than a year.

8. Plan assets are tangible assets that are both long-lived and used to produce or sell
products and services. Examples are equipment, machinery, buildings, and land that
are used to produce or sell products and services. The order listing for plant assets is
usually from most liquid to least liquid such as equipment and machinery to buildings
and land.

9 Current liabilities are obligations due to be paid or settled within one year or the operating
cycle, whichever is longer.

10 Long term liabilities are obligations not due within one year or the operating cycle,
whichever is longer.

QS 4-8 (Static) Preparing closing entries

The following is the adjusted trial balance of Sierra Company.
 
Sierra Company
Adjusted Trial Balance
December 31
Account Title Debit Credit
Cash Asset $ 5,000  
Prepaid insurance Asset 500  
Notes receivable (due in 5 years) Asset 4,000  
Buildings Asset 20,000  
Accumulated depreciation—Buildings Asset   $ 12,000
Accounts payable Liabilities   2,500
Notes payable (due in 3 years) Liabilities   3,000
L. Sierra, Capital   10,500
L. Sierra, Withdrawals Withdrawal 1,000  
Consulting revenue Revenue   9,500
Wages expense 3,500  
Depreciation expense—Buildings 2,000  
Insurance expense 1,500  
Totals $ 37,500 $ 37,500
 
Prepare its December 31 closing entries.
 
No Date General Journal Debit Credit
1 Dec 31 Consulting Revenue 9500
Income Summary 9500

2 Income Summary Account 7000

Wages Expense 3500

Depreciation Expense 2000
Insurance Expense 1500

3 Income Summary 2500

Capital 2500

4 Capital 1000
Withdrawl account 1000