Temporary vs. permanent accounts — what's the difference?

Temporary (nominal): revenues, expenses, drawings, and Income Summary — reset to zero each period. Permanent (real): assets, liabilities, and Owner's Capital — carry forward.

Quick test: is an account temporary or permanent?

If it's on the income statement (or it's Drawings), it's temporary and gets closed. If it's on the balance sheet, it's permanent and stays.

What do closing entries accomplish?

They reset every temporary account to zero and transfer the period's net income (or loss) and the owner's drawings into Owner's Capital.

What is the Income Summary account?

A temporary account used only in closing. Revenues and expenses are closed into it; its balance equals net income (credit) or net loss (debit), which is then closed to Owner's Capital.

List the four closing entries in order.

1) Close revenues to Income Summary. 2) Close expenses to Income Summary. 3) Close Income Summary to Owner's Capital. 4) Close Owner's Drawings to Owner's Capital.

Closing entry #1 — close revenues?

Debit each revenue account for its balance; credit Income Summary for the total. (Revenues have credit balances, so debiting clears them.)

Closing entry #2 — close expenses?

Debit Income Summary for the total; credit each expense account for its balance.

Closing entry #3 — close Income Summary (net income)?

With a net income (credit balance): debit Income Summary, credit Owner's Capital. Profit raises capital.

Closing entry #3 with a net LOSS?

Income Summary has a debit balance. Debit Owner's Capital, credit Income Summary — a loss reduces capital.

Closing entry #4 — close drawings?

Debit Owner's Capital; credit Owner's Drawings. Drawings close directly to capital, never through Income Summary.

How do you compute ending Owner's Capital?

Beginning capital + net income − drawings = ending capital. (Or − net loss.) Example: 40,000 + 10,000 − 5,000 = 45,000.

What is a post-closing trial balance?

A trial balance taken after closing. It lists ONLY permanent accounts (assets, liabilities, ending capital); its debit and credit columns must still be equal.

Which accounts do NOT appear on a post-closing trial balance?

All temporary accounts — revenues, expenses, drawings, and Income Summary — because closing reset them to zero.

List the steps of the accounting cycle.

Analyze → journalize → post → trial balance → adjusting entries → adjusted trial balance → financial statements → closing entries → post-closing trial balance.

Correcting entries vs. adjusting entries — what's the difference?

Adjusting entries are planned and made every period end. Correcting entries are unplanned, made whenever an error is found, and can involve any accounts.

How do you build a correcting entry?

Compare the wrong entry to the correct entry, and record whatever gets you from one to the other. (Some prefer: reverse the wrong entry, then record the right one.)

What are the main sections of a classified balance sheet?

Current assets; property, plant & equipment; (long-term investments; intangibles); current liabilities; long-term liabilities; owner's equity.

What are current assets?

Cash and assets expected to be converted to cash or used up within one year (or the operating cycle): Cash, Accounts Receivable, Supplies, Prepaid Insurance.

How is equipment shown on a classified balance sheet?

Under property, plant & equipment, at cost LESS accumulated depreciation — its net book value. Equipment 45,000 − accum. dep. 9,000 = 36,000.

Current vs. long-term liabilities?

Current: due within a year (Accounts Payable, Salaries Payable, Unearned Revenue). Long-term: due beyond a year (a long-term Notes Payable).

A multi-column working tool with five column-pairs — Trial Balance, Adjustments, Adjusted Trial Balance, Income Statement, Balance Sheet — used to organize the data for the financial statements. It is NOT a permanent accounting record.

What are the five column-pairs of a worksheet, in order?

Trial Balance -> Adjustments -> Adjusted Trial Balance -> Income Statement -> Balance Sheet.

On a worksheet, where does NET INCOME appear?

In the Income Statement DEBIT column and the Balance Sheet CREDIT column — the figure that makes both column-pairs balance.

On a worksheet, where does a NET LOSS appear?

In the Income Statement CREDIT column and the Balance Sheet DEBIT column.

Which accounts are extended to the Balance Sheet columns of a worksheet?

Assets, liabilities, Owner's Capital, and Owner's Drawings.

Is the worksheet a permanent accounting record?

No. It is an optional working tool — not journalized, not posted, and not part of the ledger.

Which three financial statements complete the accounting cycle?

Income statement, owner's equity statement, and balance sheet — prepared in that order.

What is the owner's equity statement formula?

Beginning capital + owner's investments + net income - drawings = ending capital. (Subtract a net loss instead of adding net income.)

What are long-term investments on a classified balance sheet?

Assets held for years and not used in operations — long-term stock or bond investments, and land held for future use.

What are intangible assets?

Long-lived assets with no physical form: patents, copyrights, trademarks, and goodwill.

Where does 'land held for future use' go on a classified balance sheet?

Long-term investments — not property, plant & equipment, because it is not used in operations.

List the asset sections of a classified balance sheet in order.

Current assets -> long-term investments -> property, plant & equipment -> intangible assets.

Correcting entry: a $1,000 collection on account was recorded as Debit Cash / Credit Service Revenue. Fix it.

Debit Service Revenue 1,000; Credit Accounts Receivable 1,000. (Cash was right; it should have credited A/R, not revenue.)

Correcting entry: a $760 equipment purchase on account was recorded as $670. Fix it.

Only the amount is wrong. Debit Equipment 90; Credit Accounts Payable 90 (760 - 670 = 90).

What is a reversing entry?

An optional entry made at the start of a new period that reverses a prior-period accrual adjusting entry, so the next cash entry can be recorded normally.

Reversing entry for accrued salaries?

If Dec 31 accrued Debit Salaries and Wages Expense / Credit Salaries and Wages Payable, the Jan 1 reversing entry is Debit Salaries and Wages Payable / Credit Salaries and Wages Expense.

Are reversing entries required?

No — they are entirely optional, only ever reverse accruals, and never change net income.

What is the operating cycle?

The average time to go from spending cash to collecting cash back from customers. 'Current' means within one year OR the operating cycle, whichever is longer.

How is a mortgage payable due in 10 years classified?

A long-term liability. (Only the portion due within the next year would be current.)

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Accounting 1 · Chapter 4 · Free

Chapter 4 — Closing Entries

How the books are closed and reset each period — temporary vs permanent accounts and the closing process step by step.

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Distinguish temporary from permanent accounts
Prepare closing entries and a post-closing trial balance
Summarize the complete accounting cycle

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Chapter 4 — Closing Entries

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