Key Terms
Think of it this way
Revenue and expenses measure what happened THIS period. If you carry them forward, next period's numbers are meaningless
Temporary (close these)
Revenue accounts, Expense accounts, Dividends, Income Summary
Permanent (keep these)
Cash, Accounts Receivable, Supplies, Equipment, Accumulated Depreciation, Accounts Payable, Unearned Revenue, Notes Paya
Purpose
Acts as a checkpoint. After revenues and expenses are closed into it, its balance equals net income (or net loss).
Source of information
The adjusted trial balance.
Debit
Retained Earnings 2,000
Credit
Dividends 2,000 Dividends had a debit balance; credit to zero. Retained Earnings is debited because paying dividends red
Income Summary now shows the net
Revenue minus expenses.
Too little liquidity
Risk of default on current obligations. Too much liquidity: assets sitting idle that could be deployed for investment or
Unearned revenue in current liabilities
If a company has heavy unearned revenue, it may need less cash on hand because the obligation is a service to provide, n
US GAAP allows three inventory methods
FIFO, LIFO, and weighted average. IFRS only allows FIFO and weighted average.
Closing entry
Journal entry that zeros out a temporary account at the end of the period, transferring the balance to a permanent accou
Income Summary
Temporary clearing account used only during closing; receives revenues and expenses, then its net balance transfers to R
Permanent (real) account
Balance carries forward to the next period; all balance sheet accounts.
Temporary (nominal) account
Zeroed out each period; revenues, expenses, dividends, income summary.