2 sections of assets in the balance sheet:

 Current Asset – cash and other assets that are expected to be converted to cashor sold or used
up usually within one year or less, through the normal operations of the business. Current
Assets may include notes receivable, accounts receivable, supplies, and other prepaid expenses.
 Property, Plant, and Equipment – may be described as fixed assets or plant assets. These assets
include equipment, machinery, buildings and land. All depreciate except land.

Notes Receivable – are amounts that customers owe.

Liabilities – amounts the business owes to creditors.

2 Sections of Liabilities in the balance sheet

 Current Liabilities – will be due within a short tim, usually one year or less.
 Long-Term Liabilities – will not be due for a long time, usually more than one year.

Owner’s Equity – owner’s right to the asset of the business.

Real Accounts – also called permanent accounts. Term for balance sheet accounts because they are
relatively permanent and carried forward from year to year.

Temporary Accounts – also called nominal accounts. Accounts that report amounts for only one period.

Closing entries – entries that transfer the balances of the revenue, expense, and drawing accounts to
the owner’s capital account.

Closing Process – transfer process of converting temporary account balances to zero by transferring the
revenue and expense account balances to Income Summary, transferring the Income Summary account
balance to the owner’s capital account, and transferring the owner’s drawing account to the owner’s
capital account.

Closing the books – process of transferring temporary accounts balances to permanent account at the
end of the accounting period.

Income Summary – a temporary account that is only used during the closing process.

Clearing Account - Another name for the Income Summary account because it has the effect of clearing
the revenue and expense accounts of their balances.
Accounting cycle – accounting process that begins with analyzing and journalizing transactions and ends
with the post-closing trial balance.

1. Transactions are analyzed and recorded in the journal.

2. Transactions are posted to the ledger.
3. An unadjusted trial balance is prepared.
4. Adjusted data are assembled and analyzed.
5. An optional end-of-period spread sheet is prepared.
6. Adjusting entries are journalized and posted to the ledger.
7. An adjusted trial balance is prepared.
8. Financial statements are prepared.
9. Closing entries are journalized and posted to the ledger.
10. A post-closing trial balance is prepared.

Fiscal Year- annual accounting period adapted by a business.

Natural business year – a fiscal year that ends when business activities have reached the lowest point in
an annual operating cycle.

Calendar year definition is - a period of a year beginning and ending with the dates that are
conventionally accepted as marking the beginning and end of a numbered year.