BAC3A - Class Discussion

Q: Mr. Lightstone, I am confident with the General Journal and General ledger. As well as the income statement and Balance sheet. But I am stell not quite sure how to do the Post Closing balance sheet and the end of the practice exam. I was wondering if you could shed some light on that for me. I know part of the exam involves the last two General Journal pages and I was wondering what they are for again. Also one last question, will the balance sheet be a six column or the other kind which I know but don't know the name, that has three columns.

A: Okay, in answer to your first question, "What goes on a post closing Trial Balance?" Well, we will record all of the same accounts that go on a normal Trial Balance EXCEPT for any revenue, expense, or drawings accounts. You see, once we have performed the closing entries, the revenue, expense, and drawings accounts will have ZERO BALANCES. Therefore, these accounts will not be listed within the POST-Closing Trial Balance.

None-the-less, the value of owner's equity will remain the same as it was before we closed the accounts - as we have simply MOVED the balance of all of the other owner's equity accounts INTO the Capital account. Remember, if we clean up all of the toys in our room by moving them into the toybox, we have not CHANGED the total value of our toys - we have simply MOVED them all into one place.

For an illustration of the Pre-Closing Trial Balance, the closing entries, and the Post-Closing Trial Balance, take a look at:

The third page of journal was just a spare sheet for people who write large. The fourth page was for the closing entries.

You should be prepared to complete EITHER a Six-Column Worksheet, OR a Report Form Classified Balance Sheet.

Q: I can't remember what the 4th owners equity account is, I know capital + Net Income, then a subtotal, and MINUS Drawings. What is the last owners equity account if there is one?

A: The four types of owner's equity accounts are:

On a balance sheet we calculate owner's equity by starting out with capital, then adding Net Income (which provides us with the net change to owner's equity caused by both revenue and expenses) and then we subtract drawings.

Capital                     $1000.00
Add: Net Income        900.00
                                ----------
                                1900.00
Minus: Drawings        200.00
                                ----------
Total Owner's Equity                1700.00

I believe the thing that confused you is the fact that there are four O.E. accounts, yet we see only three figures in the O.E. section of the balance
sheet. That is because Net Income takes both revenue AND expenses into account.

> Q: sir, im really really cinfused. i know there is a difference between office supplies > and office equipment, (supplies goes on current) and (equip goes on > fixed) BUT my sister is confusing me. she says that supplies are an > expanse?????!?!?!?!!?!? A: No problem... it's a fairly simple point of confusion. The fact is this: supplies are an asset WHILE we have them. Once we use them up, they BECOME an expense. Let me explain... Unlike office equipment, supplies will actually DISAPPEAR as we use them. For example, imagine that we buy $400.00 worth of photocopy paper. Before we use the paper we will have $400.00 worth of Office Supplies - a current asset. However, as we use the paper it will disappear, thus we observe a typical expense in action - the "outflow of an asset resulting from the operation of the business." Imagine that we count our paper at the end of the month, and we find only $275.00 worth of paper left! We quickly deduce that $125.00 of paper was used up during the month. That means that $125.00 of paper has changed from being an asset to being an expense. We will refer to the paper which has been used up as "Supplies Expense." The entry we would use to illustrate this adjustment to the Office Supplies account is as follows: Date Account Name and Details Debit Credit Dec 31 Office Supplies Expense 125.00 Office Supplies 125.00

> Q: sir can you please explain to me what cross referencing is? A: Cross-referencing is a general term (applied to areas other than just accounting) applied to situations where two separate items contain a reference to each other. For example, a General Journal and a General Ledger are "cross-referenced" because they each contain a reference to the other.

> Q: What the > difference between real and nomial account is? A: A real account is any account which carries its balance from one accounting period into the next. Assets, liabilities, and the Capital account are real accounts. Nominal accounts (also known as temporary accounts) do not carry their balance from one period to the next, as they are closed at the end of each accounting period. Revenues, expenses, and drawings are nominal accounts.

> Q: What is the difference > between income summary and owner's equity account? A: First of all, there is no such thing as an "owner's equity account." Owner's equity is an "element" of the accounting equation. The owner's equity section of the accounting equation contains four different types of accounts. They are Revenues, Expenses, Capital, and Drawings. However, immediately after we close the nominal accounts, the "Capital" account will in fact reflect the owner's total equity in the firm. The Income Summary (otherwise known as the Revenue and Expense Summary) is a temporary owner's equity account which we set up and use only when we are closing our nominal accounts. We transfer all of our revenues to it (so they will appear as credits - additions to owner's equity); and then we transfer all of our expenses to it (so they will appear as debits - reductions from owner's equity). Once we do this, the balance of the account will reflect the total net income or net loss for the firm. We then close the Income Summary by transfering its balance into the Capital account in order to update it.

Q: Could you shed some light on the objectvity principle? A: First, take a look at the explanation and definition on page 108. Basically, it states that all transactions must be supported by some form of external documentation (ie. external to the General Journal, General Ledger, etc.) called source documents. Good examples of source documents are receipts, invoices, statements, cashed cheques, remittance slips, etc.. The idea behind this principle is that we cannot accept that a transaction took place solely on the business' word. Source documents must verify all transactions. These documents allow us to confirm transactions with the other parties who were invovled in them.

Q: I have some questions for teh test......... What is merchandsing and manufacturing??? A: Merchandising Business: a business that buys finished goods and sells them at increased prices. Manufacturing Business: a business which uses various input materials to produce or assemble an original product.