Can you please whether the following statements about accounting and closing entries are true or false? 1. Closing entries are necessary if the business plans to continue operating in the future...

Can you please whether the following statements about accounting and closing entries are true or false?

1. Closing entries are necessary if the business plans to continue operating in the future and issue financial statements each year.
2. The owner's drawings account is closed to the Income Summary account in order to properly
determine Profit (or loss) for the period.
3. After closing entries have been journalized and posted, all temporary accounts in the ledger
should have zero balances.
4. Cash is a temporary account and it should be zero after all closing entries have been posted.
5. Closing entries are an optional part of the accounting cycle.
6. Reversing Entries are an optional part of the accounting cycle.
7. The owner's drawings account is a permanent account whose balance is carried forward to the
next accounting period.
8. Closing entries are journalized after adjusting entries have been journalized.
9. After the closing entries are posted to the accounts, a trial balance will show balances only in
the Balance Sheet Accounts.
10. The final step in the accounting process is the pre-closing trial balance.
11. A company has only one accounting cycle over its economic existence.
12. The accounting cycle begins at the start of a new accounting period.
13. Correcting entries are made any time an error is discovered even though it may not be at the
end of an accounting period.
14. Current assets are normally listed in the balance sheet in order of permanency.
15. Under International Financial Reporting Standards, current assets may be shown after non
current assets on the Balance Sheet.
16. Another name for Balance Sheet is the Statement of Financial Position.
17. All Canadian companies must follow the new International Financial Reporting Standards.
18. Cash and office supplies are both classified as current assets.
19. Long-term investments would appear in the property, plant, and equipment section of the
balance sheet.
20. A liability is classified as a current liability if it is to be settled within one year from the balance
sheet date or in the company's normal operating cycle.
21. Common Canadian practice shows current assets as the first items listed on a classified
balance sheet.
22. The current ratio is the ratio of current liabilities divided by current assets.
23. Abbott Manufacturing Company's current ratio is 2:1. The company has $50,000 in current
liabilities; current assets must be $25,000.
24. The difference between current assets and current liabilities is called working capital.
25. The acid-test ratio is a measure of a company's long term liquidity.
26. Drawings will appear in the balance sheet debit column of a work sheet.
27. If a company has a loss in the period, the amount of the loss will appear in the income
statement credit column and the balance sheet debit column of the work sheet.
28. If total credits in the income statement columns of a work sheet exceed total debits, the
company has profit.
29. It is not necessary to prepare formal financial statements if a work sheet has been prepared because financial position and profit are shown on the work sheet.

 

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Karen P.L. Hardison | College Teacher | eNotes Employee

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[The limits of the eNotes format prohibits discussion of all 29 True/False questions, but the following should help on the topic of closing entries.]

1. Closing entries are necessary if the business plans to continue operating in the future and issue financial statements each year.

Closing entries are prepared at the end of the accounting cycle so that the temporary account can be zeroed out to be ready for the next accounting cycle and so that the balances in revenue and dividends can be transferred to the permanent account.

Your statement asserts that closing accounts are necessary to the operation of the business and to the issuance of annual financial statements.

In that closing statements transfer accounting cycle information on revenue and dividends from temporary accounts to permanent accounts and in that they facilitate calculation of actual revenue income and dividend payments, then it might be said that closing entries are necessary to future operations and the issuance of financial statements: financial statements cannot be issued from temporary account information, only from permanent account information; operations depend upon actual revenue and dividend payments. Thus, in these regards, it is TRUE that closing entries are necessary to operations and financial statements.  

2. The owner's drawings account is closed to the Income Summary account in order to properly determine Profit (or loss) for the period.

In calculating the closing entries for an accounting cycle the accounts that are not closed are assets, liabilities and owner's equity. These are fixed permanent account entries and form the beginning balances for the next accounting cycle.

The accounts that are closed in closing entries are revenue (which fluctuates per cycle), expense (which also fluctuates) and drawing accounts (which may similarly fluctuate per accounting cycle).

The order in which these temporary accounts are closed is as important as which accounts are closed. The Income Summary is closed to Retained Earnings in closing entries while the owners drawing/withdrawal accounts are closed to Retained Earnings because drawing reduce the capital account balance. Therefore it is FALSE that the drawing account is closed to the Income Summary and equally FALSE that the order of closing is due to the effect of drawing on Profit and Loss.

3. After closing entries have been journalized and posted, all temporary accounts in the ledger should have zero balances.

The function of closing accounts is to reset temporary accounts at the end of an accounting period (cycle) so they have zero balances at the beginning of the next accounting period. Therefore it is TRUE that after the closing entry process is completed, all temporary accounts will have zero balances.

4. Cash is a temporary account and it should be zero after all closing entries have been posted.

Only temporary accounts are closed to closing entries. Temporary accounts are revenue, expense and drawing accounts. Temporary accounts are transferred to permanent accounts and have ending balances of zero.

Permanent accounts are not closed to closing entries. Permanent accounts are assets, liabilities and owner or shareholder equity. They are not balanced to zero and their balances are carried over to become the opening balances of the next accounting period.

The permanent category of assets includes such items as: cash and cash equivalents; supplies; short and long term investments; inventory; land; vehicles. Consequently cash belongs in the permanent account of assets, is not zeroed at the end of an accounting period and is not a temporary account. Therefore it is FALSE that cash is a component of a temporary account and that it should be a zero entry account in closing entries.

5. Closing entries are an optional part of the accounting cycle.

Closing entries are not an optional function in the accounting cycle. Business operation and annual financial statements depend upon the function performed by closing entries at the end of each accounting cycle/period. Therefore it is FALSE to say that closing entries are optional.

6. Reversing Entries are an optional part of the accounting cycle.

Reversing entries is a process where by accrual adjustments are reversed so as not to be double-entered in the subsequent accounting period. Reversing entries is a protective action and is required to occur and "be dated as of the first day of the accounting period immediately following the period of the accrual-type adjusting entries." Since reversing entries are protective against double entries and since they are required to be dated on a specific date of the new accounting period, then it is FALSE that reversing entries are optional.

7. The owner's drawings account is a permanent account whose balance is carried forward to the next accounting period.

Cash is a permanent account while the reverse is true of withdrawal or drawing accounts. The owner's drawing account (or accounts) are not permanent; it is temporary. As such, it is one of the three accounts (revenue, expense, drawing) that are closed to closing entries at the end ao each accounting cycle. Therefore it is FALSE that drawing accounts are permanent and equally FALSE that their balance is carried forward: as a temporary account, drawing accounts are zeroed out.

8. Closing entries are journalized after adjusting entries have been journalized.

Adjusting entries accommodate the time lag between accounting periods and receipt of revenue of payment of expenses that sometimes may occur. Adjusting entries are a component of closing entries therefore it is TRUE that closing entries are made (journalized) after adjusting entries are made (journalized). In other words, adjusting entries are journalized before closing entries are journalized since adjusting entries are a component of temporary accounts to be journalized.

12. The accounting cycle begins at the start of a new accounting period.

Accounting period and accounting are often used synonymously by various accounting experts. Therefore it is TRUE to say that a given accounting cycle begins at the start of a new accounting period. Accounting period refers specifically to the time-frame of each accounting cycle, while accounting cycle refers specifically to the accounting practices undertaken within that accounting period.

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