1.) What is the purpose of the closing process? 2.) What is an accrued liability
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Question
1.) What is the purpose of the closing process?
2.) What is an accrued liability?
3.) What is the difference between permanent accounts and temporary accounts, and why does an accounting system have both types of accounts?
4.) Describe the difference between external events and internal events in Accounting, and give two examples of each.
5.) What is the purpose of the statement of cash flows? List the three major categories of cash flows and give an example of a cash transaction for each category.
Explanation / Answer
1. The purpose of the closing entry is to bring the temporary journal account balances to zero for the next accounting period, which aids in keeping the accounts reconciled.
2.Accrued liabilities are liabilities that reflect expenses on the income statement that have not been paid or logged under accounts payable during an accounting period; in other words, obligations for goods and services provided to a company for which invoices have not yet been received. Examples would include accrued wages payable, accrued sales tax payable, and accrued rent payable.
3.The difference between Temporary and Permanent accounts is very simple.
Temporary accounts are accounts that go into your income statements ( Revenue and Expenses Accounts) plus withdrawal account. These accounts get closed at the end of the fiscal year because they don't carry any balance into the following year.
Example: Let's assume you own a small grocery store and at the end of your fiscal year you earn a revenue of $10,000 (in sale) , expenses related to the revenue is $6,000 and withdrawal $1,000 cash from your business account. When you start a new fiscal year you will have a zero balance in your revenue, expense and withdrawal accounts because it's a new year and the revenue (sale) from last year will have nothing to do with your new year's revenue and the same goes to expenses and withdrawals accounts.
Permanent accounts are also called real accounts because they don't get closed up at the end of fiscal year. These accounts stay open as long as the company remains in business. Real accounts are all assets accounts, liabilities ( includes unearned revenues) and equity accounts.
4.Balance sheets, statements of a business's financial condition, are prepared for internal and external use. External balance sheets and internal balance sheets are intended for different audiences and for different purposes:
Internal balance sheets: For reporting financial condition within your business, internal balance sheets include much more detail than external ones, either in the body of the financial statement itself or, more likely, in supporting schedules. This figure shows an internal balance sheet for Typical Business, Inc.
Greater detail allows for better control, analysis, and decision-making. Internal balance sheets and their supporting schedules should provide all the detail that you need to make good business decisions.
External balance sheets: Balance sheets presented in external financial reports (which go out to investors and lenders) don't include a whole lot of detail. This figure shows a Typical Business, Inc. external balance sheet.
The gross receipts and gross payments will be reported in the cash flow statement according to one of the following classifications: operating activities, investing activities, and financing activities. The net change from these three classifications should equal the change in a company's cash and cash equivalents during the reporting period. For instance, the cash flow statement for the calendar year 2013 will report the causes of the change in a company's cash and cash equivalents between its balance sheets of December 31, 2012 and December 31, 2013.
In addition to the cash amounts being reported as operating, investing, and financing activities, the cash flow statement must disclose other information, including the amount of interest paid, the amount of income taxes paid, and any significant investing and financing activities which did not require the use of cash.
The statement of cash flows is to be distributed along with a company's income statement and balance sheet.
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