ACCTG 101 Lecture Notes - Lecture 5: Foal, Internal Control, Physical Security
Document Summary
When a company incurs and expense before it pays cash, the company should always increase a payable account and an expense account for the amount incurred. The payable account should be adjusted up and the expense account should also be adjusted up. When the company pays the liability, the liability account is reduced and the cash account is decreased. In addition, every adjusting journal entry will affect at least one asset or liability account. Therefore, cash will never be increased or decreased in an adjusting entry. The closing process is when all revenue, expense and dividend account balances are transferred to the retained earnings account. First, revenue, expense and dividend accounts are temporary accounts, meaning that they accumulate balances only for the current period. After the period ends and financial statements are prepared, all temporary accounts must be reset to zero for the start of the next period.