Adjusted Trial Balance to Year-End Close for FMAA™

What are the purpose of dividing a business’ financial reporting into accounting periods?

To enable comparisons of operating results for the current period with results of prior periods for analysis purposes.
To ensure financial statements are complete and accurate by reporting all assets and liabilities as of the close of business on the last day of the period.
To ensure revenues, gains, expenses, and losses applicable to the period are accurately reported.

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What are adjusting entries used for?

To update accounts with any transactions applicable to the current accounting period but not yet recognized.
To ensure financial statements report correct amounts by the end of each accounting period.

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What principle states that revenue is to be recognized in the accounting period in which the performance obligation to the customer is satisfied?

Revenue Recognition Principle

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What principle is commonly called the matching principle?

Expense Recognition Principle

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What are the three methods of expense recognition?

Cause and effect
Systematic and rational allocation
Immediate recognition

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What are the principal types of transactions that require adjusting entries?

Recorded costs and receipts needing apportionment as expenses or revenue.
Unrecorded expenses that need recognition.
Unrecorded revenue that needs recognition.
Asset valuation adjustments.

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What is depreciation?

It is the allocation of costs for fixed assets to the appropriate accounting periods.

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What is a contra-asset account?

An account in the asset section of the balance sheet that carries a credit balance, reducing the value of the related asset account.

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What are deferred revenues?

This is money collected in advance for assets or services to be transferred to the customer in a future period, also known as contract liabilities.

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What are accrued expenses?

These are costs incurred by the company during the current accounting period that need to be recorded even if an invoice has not been received.

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What are deferred expenses?

These are payments made in advance of receiving a good or service, recognized over time as the benefit is received.

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What are accrued revenues?

These are revenues recognized for performance obligations fulfilled, even if an invoice has not been generated.

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What might require asset valuation adjustments?

Adjustments may be needed for ending inventory balance or other asset valuations to match physical counts or correct valuations.

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What is the purpose of a contra-asset account?

To decrease the valuation of an asset on the balance sheet.
To hold credit balances that offset the debit balances of asset accounts.

Contra-asset accounts, such as Accumulated Depreciation, are used to track reductions in the value of assets over time.

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Why is land not depreciated?

Land is not depreciated because it is not used up and does not wear out.

Unlike other fixed assets, land does not have a finite useful life, which is why it is not subject to depreciation.

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What is the adjusting entry for inventory when a physical count reveals a discrepancy?

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Adjust the Inventory account for the discrepancy amount.
Adjust the Cost of Goods Sold for the same amount.

The inventory account is debited when the count reveals more inventory t

This adjustment ensures that the Inventory account reflects the actual physical inventory on hand.

How is prepaid insurance expense adjusted at the end of the accounting period?

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Debit Insurance Expense for the amount used.
Credit Prepaid Expense for the same amount.

This adjustment recognizes the portion of prepaid insurance that has been consumed during the period.

What is the purpose of accruing utility expenses?

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To recognize expenses incurred but not yet paid by the end of the accounting period.

Accruing utility expenses ensures that expenses are matched with the period in which they are incurred, adhering to the accrual basis of accounting.

Why is an adjusted trial balance prepared at the end of an accounting period?

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To ensure that all adjusting entries have been correctly posted and that the ledger accounts are balanced.

The adjusted trial balance serves as a basis for preparing financial statements.

What is the importance of an adjusted trial balance?

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To include the adjusting entries and ensure the accounting records are accurate before preparing financial statements.

An adjusted trial balance is reviewed to make necessary corrections and prepare accurate financial statements.

What is the purpose of the year-end close in accounting?

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To reset temporary ledger account balances to zero and prepare for the next fiscal year’s activity.

The year-end close involves closing temporary accounts and transferring their balances to the Retained Earnings account.

Which accounts are considered temporary accounts?

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Revenue accounts
Gain accounts
Expense accounts
Loss accounts
Dividends account

Temporary accounts are closed at the end of the accounting period to the Retained Earnings account.

What is the Income Summary account used for?

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As an interim step and control during the closing process to transfer income statement account balances to Retained Earnings.

The Income Summary account is a temporary holding account used primarily in manual accounting systems.

True or False:

Permanent accounts are closed at the end of the accounting period.

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False

Permanent accounts, such as balance sheet accounts, are not closed and their balances carry over to the next period.

What is the **first step** in the closing process?

Closing the income statement accounts to the Income Summary account. ## Footnote This step ensures that all temporary accounts are reset to zero for the new accounting period.

What happens to the **Dividends account** during the **closing process**?

It is closed to the Retained Earnings account by **crediting the Dividends account** and **debiting Retained Earnings**. ## Footnote This step is necessary if dividends have been debited to a separate Dividends account.

# Fill in the blanks: The balance in the Income Summary account after closing should equal the \_\_\_\_\_\_ \_\_\_\_\_\_ (loss) on the income statement.

net income ## Footnote This ensures that the closing process accurately reflects the company's financial performance.

What are the **eight steps** in the **accounting cycle**?

1. Identify financial events and gather details. Analyze the events to determine impact on financial elements. 2. Record transactions in the General Journal. 3. Post transactions to ledger accounts. 4. Prepare unadjusted trial balance. 5. Make adjusting entries. 6. Prepare adjusted trial balance. 7. Prepare financial statements. 8. Prepare and post closing entries and prepare post-closing trial balance.

What is the purpose of **closing entries** in the accounting cycle?

To **reset all temporary accounts to zero balances** and ensure **total debits and credits are equal** in the post-closing trial balance.

What happens to the **Income Summary account** when a company operates profitably?

The Income Summary account has a **credit balance and is debited to zero it out**. ## Footnote Retained Earnings is credited by the same amount.

What is the **result of closing the Income Summary account** to Retained Earnings?

The Income Summary account balance is **reduced to zero**, and Retained Earnings is **adjusted** by the net income or loss.

What is the purpose of a **post-closing trial balance**?

To verify that **all temporary accounts have zero balances** and that total debits and credits are **equal**.

When should **reversing entries** be posted?

At the **beginning of the following accounting period** for accruals that require them. ## Footnote Reversing entries prevent duplication of amounts accrued in the previous period when regular transactions are processed.

# True or False: All accruals should be reversed at the beginning of the next accounting period.

False ## Footnote Only accruals for which regular processing of an invoice or source document will duplicate the amount accrued should be reversed.

What is the **role of an accountant** regarding reversing entries?

Ensure needed reversing entries are posted at the beginning of the next period to **prevent duplication** and **ensure correct payment amounts**. ## Footnote Accountants must monitor accruals that require reversal to maintain accurate accounting records.

What happens if an **accrual** is **not reversed** when it should be?

The amount accrued may be **duplicated** in the accounting system, leading to **incorrect financial records**. ## Footnote This duplication can cause inaccuracies in expense reporting and financial statements.

Adjusted Trial Balance to Year-End Close Flashcards

Apply the full accounting cycle from adjusting entries through financial statement preparation and closing. (36 cards)