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Smart book chapter 4 review part 2 Flashcards

October 19, 2020

Closing Entries, Sales, Sales Returns & Allowances In Accounting

The main difference is that assets are valued at net realizable value and can be increased or decreased as values change. Under GAAP, once values are reduced they cannot be increased again. Many businesses compare their monthly expenses to their monthly budget. Analyzing these outcomes is essential for monitoring a company’s financial health.

What are the journal entries for sales returns and allowances?

Sales returns and allowances is a contra revenue account with a normal debit balance used to record returns from and allowances to customers. The account, therefore, has a debit balance that is opposite the credit balance of the sales account.

Income Statement accounts are called nominal or temporary accounts because income statement accounts are closed at the end of a reporting period to bring the balances to zero. Examples of temporary accounts are sales and expenses. Accountants can close accounts for any reporting period (e.g. monthly, quarterly, and yearly).

Closing Entries:

The closing of the books provides a clean slate for the next period. The “books” related to the business are the revenue, spending, and income summary reports in accounting. These “books” serve as a tracker for businesses to know how much money is going in and out of their businesses. A business owner can close the books by zeroing out the income and expense accounts and then entering the net profit or net loss on the balance sheet.

  • When you close a temporary account at the end of a period, you start with a zero balance in the next period.
  • In addition, if the accounting system uses subledgers, it must close out each subledger for the month prior to closing the general ledger for the entire company.
  • A sales allowance and sales discount follow the same recording formats for either perpetual or periodic inventory systems.
  • A buyer debits Accounts Payable if the original purchase was made on credit and the payment has not yet been made to a seller.
  • The globalization of commerce, rising energy costs, and the increasing use of overnight delivery via more expensive air transportation all contribute to high freight costs.
  • To do this, we will do the opposite of the balance in the adjusted trial balance in a journal entry and use Income Summary to balance the entry.

Closing entries are performed at the end of an accounting cycle and are a way to close out the balances of temporary accounts. Clear the balance of the expense accounts by debiting income summary and crediting the corresponding expenses. Permanent accounts are accounts that show the long-standing financial position of a company.

Accounting Treatment

Businesses typically list their accounts using a chart of accounts, or COA. Your COA allows you to easily organize your different accounts and track down financial or transaction information. A debit memo is a document sent by a purchaser to the seller showing the amount by which the purchaser proposes to debit the seller’s account.

With this technique, the initial purchase is again recorded by debiting Purchases and crediting Accounts Payable. However, the amount of the entry is for the invoice amount of the purchase, less the anticipated Closing Entries, Sales, Sales Returns & Allowances In Accounting discount. Assuming the company intends to take the discount, this entry results in recording the net anticipated payment into the accounts. You might also use sub-accounts to record transactions.

Posted in Bookkeeping

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