Completing the Accounting Cycle

Completing the Accounting Cycle

Instructions: Encircle the corresponding number if the statement is TRUE and mark X to the number which contains FALSE statement.

1. If the post-closing trial balance does not balance, then the error(s) definitely occurred at some point during the closing process.
2. All nominal accounts must be closed before the Income Summary account can be closed.
3. The post-closing trial balance will have fewer accounts than the adjusted trial balance.
   4.
   The balances of all the accounts that appear on a balance sheet are
   the same on the adjusted trial balance as they are on a post-closing trial balance.
4. The post-closing trial balance will contain only real accounts.
5. The post-closing trial balance contains asset, liability, withdrawal and capital accounts.
6. A reversing entry is a journal entry which is the exact opposite of a related adjusting entry made at the end of the period.
7. Post-closing trial balance tests the equality of the accounts after the adjustments and the closing entries are posted.
8. Supplies Expense is a temporary account.
9. During the closing process, revenues are transferred to the credit side of the Income Summary account.
10. The income summary account is used to close the income and expense
    accounts. 12. The balance of the owner’s capital account represents the cumulative
    net result of income, expense and withdrawal transactions. 13. Closing entries clear income and expense accounts at the end of the
    period. 14. In the accounting cycle, information from source documents is initially recorded in the journal.
11. Nominal account balances are reduced to zero by closing entries.
12. The only accounts that are closed are income statement accounts.
13. Closing entries result in the transfer of profit or loss into the owner’s Capital account.
14. After all closing entries have been entered and posted, the balance of the Income Summary account will be zero.
15. Depreciation Expense-Building is a temporary account.
16. Withdrawals is a temporary account.

The Correct Answer and Explanation is :

Here is the corrected answer with explanations:

TRUE (✔) or FALSE (X):

1. ✔ If the post-closing trial balance does not balance, then the error(s) definitely occurred at some point during the closing process.

• A balancing post-closing trial balance ensures that all the accounting entries have been correctly completed, including the closing process. If it doesn’t balance, an error has occurred in posting or the trial balance process.

1. ✔ All nominal accounts must be closed before the Income Summary account can be closed.

• Nominal accounts (revenues and expenses) must be closed to the Income Summary account to determine the net income or loss for the period before transferring it to the Capital account.

1. ✔ The post-closing trial balance will have fewer accounts than the adjusted trial balance.

• The adjusted trial balance includes both real (permanent) and nominal (temporary) accounts, while the post-closing trial balance only includes real accounts since all nominal accounts are closed.

1. ✔ The balances of all the accounts that appear on a balance sheet are the same on the adjusted trial balance as they are on a post-closing trial balance.

• After closing, real accounts (assets, liabilities, and owner’s equity) appear in both adjusted and post-closing trial balances, showing the same balances.

1. ✔ The post-closing trial balance will contain only real accounts.

• The post-closing trial balance contains only real (permanent) accounts, as temporary accounts (like revenues and expenses) are closed.

1. X The post-closing trial balance contains asset, liability, withdrawal, and capital accounts.

• This statement is incorrect because withdrawals are not real accounts; they are temporary (nominal) accounts, which are closed during the closing process.

1. ✔ A reversing entry is a journal entry which is the exact opposite of a related adjusting entry made at the end of the period.

• Reversing entries undo certain adjusting entries for the next period, ensuring the accounting cycle starts fresh.

1. ✔ Post-closing trial balance tests the equality of the accounts after the adjustments and the closing entries are posted.

• The post-closing trial balance ensures that the debits and credits remain in balance after all closing and adjustment entries.

1. ✔ Supplies Expense is a temporary account.

• Supplies Expense is a temporary account that is closed at the end of the period as part of the closing entries.

1. ✔ During the closing process, revenues are transferred to the credit side of the Income Summary account.

• Revenues are closed into the Income Summary account on the credit side during the closing process.

1. ✔ The income summary account is used to close the income and expense accounts.

• The Income Summary account helps close the income and expense accounts to determine net income or loss.

1. ✔ The balance of the owner’s capital account represents the cumulative net result of income, expense, and withdrawal transactions.

• The owner’s capital account reflects all the income, expenses, and withdrawals made over time.

1. ✔ Closing entries clear income and expense accounts at the end of the period.

• Closing entries reset income and expense accounts to zero to prepare for the next period.

1. ✔ In the accounting cycle, information from source documents is initially recorded in the journal.

• Source documents are first recorded in the journal, where transactions are initially documented.

1. ✔ Nominal account balances are reduced to zero by closing entries.

• Closing entries bring nominal account balances to zero, preparing them for the next period.

1. X The only accounts that are closed are income statement accounts.

• This is incorrect because in the closing process, the owner’s withdrawal accounts are also closed, not just income statement accounts.

1. ✔ Closing entries result in the transfer of profit or loss into the owner’s Capital account.

• Profit or loss from the Income Summary account is transferred to the owner’s Capital account during the closing process.

1. ✔ After all closing entries have been entered and posted, the balance of the Income Summary account will be zero.

• After all closing entries, the Income Summary account will have a zero balance since all income and expenses have been closed out.

1. ✔ Depreciation Expense-Building is a temporary account.

• Depreciation Expense-Building is a temporary account and is closed at the end of the period.

1. X Withdrawals is a temporary account.

• Withdrawals (drawings) are treated as a reduction of the owner’s equity, but it is a nominal account, not a permanent one, and it is closed during the period-end process.

Explanation:

The accounting cycle involves multiple stages, including recording transactions in the journal, posting to the ledger, making adjustments, closing entries, and preparing the post-closing trial balance.

• Nominal (temporary) accounts are used to track revenues, expenses, and withdrawals over a single accounting period. These accounts are closed at the end of the period to prepare for the next period.
• Real (permanent) accounts represent assets, liabilities, and the owner’s equity, which are carried forward to the next period without being closed.
• The post-closing trial balance ensures that after closing entries, the books remain balanced with only real accounts.