Homework Clinic
Social Science Clinic => Accounting => Topic started by: strangeaffliction on Jul 6, 2018
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Compare and contrast a post-closing trial balance with a trial balance before closing.
Question 2
Define internal and external sources of liquidity. What is a material deficiency in liquidity? If a firm has a material deficiency in liquidity what should be reported in the management discussion and analysis?
What will be an ideal response?
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Answer to Question 1
Both trial balances show whether or not the debits and credits are equal. The trial balance before closing contains the asset, liability, owner's equity, revenue, and expense accounts. The post-closing trial balance is prepared after closing and contains only the real (permanent) accounts (asset, liability, and Capital accounts). The nominal (temporary) accounts are closed and do not have a balance. Also, the trial balance before closing does not have the current balance of the owner's Capital account. The post-closing trial balance has an updated Capital account balance which includes net income (loss) and withdrawals.
Answer to Question 2
Internal sources of liquidity include the cash received from selling products and services; external sources of liquidity include cash received from outside sources such as borrowing or selling the firm's stock to raise funds. A material deficiency in liquidity means that a firm may not have enough cash to make it through another operating cycle. If a firm has a material deficiency the firm must discuss how this deficiency will be remedied so that bankruptcy will hopefully be prevented.