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Closing entries used to update Retained Earnings account and to reset Revenue, Expense,
Dividend, Gain, and Loss accts to 0
1. Debit each revenue/gain account in amount of credit balance to close them; temporary
Income summary is credited in same amount
2. All expense & loss accts closed by crediting expense/loss acct in amount of debit
balance and debiting temporary Income Summary acct
3. Income summary acct closed to Retained Earnings; if income summary has debit
balance, income summary is credited and retained earnings is debited and vice versa
4. Dividend acct closed by crediting in amount of debit balance and debiting RE
1. Economic entity: entity which is providing info should be well defined; Inter alia,
should be clear what entities have or have not been consolidated
2. Going concern assumption: firm will remain in business unless something suggests
otherwise (certain methods i.e. depreciating an asset over time) not appropriate when this
assumption is violated
3. Monetary unit assumption: info should be expressed in monetary terms
4. Periodicity: economic activities of firm are divided into time periods
5. Objectivity: ability of independent party to verify financial statements of firm is deemed
important in accounting
6. Conservatism: when uncertainty exists, unfavorable outcome is reflected in financial
statements immediately whereas favorable outcome is deferred until it occurs
7. Materiality: accounting treatment for relatively minor items dont matter (those which
do not influence decisions made by readers of financial statements); magnitude w/o regard
to nature of item will not be sufficient basis for materiality judgment
8. Revenue recognition principle: a) revenue has been earned; b) revenue is
realized/realizable (when resources are received or realizable when resources to be
received are readily convertible into some other asset)
9. Matching concept: firm records expenses such that resources used in getting those
revenues are deducted in calculation of Net Income in same acct period as related revenues
are recognized
Percentage of completion method: revenue recognized each accounting period over life of
contract; no revenue recognized until contract actually complete; conditions:
- contract clearly specifies enforceable rights regarding goods & services to be provided
and received by parties, consideration to b exchanged, and manner and terms of settlement