Key Terms

classified balance sheet

presents information on your balance sheet in a more informative structure, where asset and liability categories are divided into smaller, more detailed sections

closing

returning the account to a zero balance

closing entry

prepares a company for the next accounting period by clearing any outstanding balances in certain accounts that should not transfer over to the next period

current ratio

current assets divided by current liabilities; used to determine a company’s liquidity (ability to meet short-term obligations)

income summary

intermediary between revenues and expenses, and the Retained Earnings account, storing all the closing information for revenues and expenses, resulting in a “summary” of income or loss for the period

intangible asset

asset with financial value but no physical presence; examples include copyrights, patents, goodwill, and trademarks

liquidity

ability to convert assets into cash in order to meet primarily short-term cash needs or emergencies

long-term investment

stocks, bonds, or other types of investments held for more than one operating cycle or one year, whichever is longer

long-term liability

debt settled outside one year or one operating cycle, whichever is longer

operating cycle

amount of time it takes a company to use its cash to provide a product or service and collect payment from the customer

permanent (real) account

account that transfers balances to the next period, and includes balance sheet accounts, such as assets, liabilities, and stockholder’s equity

post-closing trial balance

trial balance that is prepared after all the closing entries have been recorded

property, plant, and equipment

tangible assets (those that have a physical presence) held for more than one operating cycle or one year, whichever is longer

temporary (nominal) account

account that is closed at the end of each accounting period, and includes income statement, dividends, and income summary accounts

working capital

current assets less current liabilities; sometimes used as a measure of liquidity