Accounting Exam 2 Chapter 4
Order of steps in accounting cycle
Analyze, Record, Summarize in T-accounts, Prepare trial balance, Report financial statments
On Dec. 5, sell $500 gift card. By Dec. 31, card has been redeemed.
Debit cash 500 Credit deferred revenue 500
Which action will be taken in the adjusting entry to record rent expense that has expired during the month?
Debit rent expense
Closing entries to close revenue & expense accounts:
Debit revenues Credit expenses Record difference in RE If done right, amount credit to RE should equal net income on income statement
Account balances that will be reduced as a result of adjusting entries?
Deferred revenue, supplies, prepaid rent
The accrual adjustment recorded to adjust for expenses incurred but not yet paid will cause:
liabilities to increase
3 months of rent were prepaid on sept. 1 for $7,200 but 1 month now has expired, leaving only 2 months prepaid at sept. 30
debit rent expense 4,200 credit prepaid rent 4,200
Of the $600 in supplies previously received, $250 remain on hand at Sept. 30
debit supplies expense 350 credit supplies 350
Balance sheet accounts, such as supplies or prepaid rent, ___ as a result of deferral adjustments
decrease
Deferred revenue is what type of adjusting entry?
deferral
When making deferral adjustments to record the amount used during the period for items such as prepaid insurance or supplies, the debit will _____ an ____ account
increase, expense
Accrued expenses
incur expense in current period to be paid for later
_____ defined as "cost of borrowing money". Since account represents a cost incurred on borrowed money, it's classified as an _____ account under stockholder's equity
interest, expense
The adjusting entry for income taxes records income tax that is incurred & ______ by the company
owed
Depreciation
the allocation of the cost of a long term assets to expense over its useful life
Adjusting entry for depreciation
debit depreciation expense, credit accumulated depreciation (which is a contra-asset)
Purpose of closing entries
-Transfer net income (or loss) and dividends to Retained Earnings. -Establish zero balances in all income statement and dividend accounts.
On Jan. 1 co. purchases a $20,000 truck. The truck has an estimated useful life of 5 years and is depreciated $4,000 per year
debit equipment 20,000 credit cash 20,000
Deferrals
Cash happens first, adjusting entry updating revenue or expense happens later, include same accounts as adjusting
If a company records a debit to salaries and wages payable and a credit to cash, what was occurred?
Company is paying for salaries and wages that had been accrued earlier
Closing entries to close dividends:
Credit dividends account for amount of it's debit balance & debit RE for same amount
Temporary accounts
Used to track only the current year's results and then are closed before the next year's activities are recorded. ex. revenues, expenses, dividends
Why are adjustments needed at the end of accounting period?
ensure all assets & liabilities are reported at appropriate amounts
what are adjustments?
ensure that the income statement includes all revenues and expenses of that period and that balance sheet amounts are updated
Adjusting entries will NEVER include
cash
entries needed for the closing process
credit expenses debit revenues record diff. in RE
The deferral adjustment to record the amount of service revenue collected in advance for which the company has now satisfied the performance obligation includes
credit to service revenue debit to deferred revenue
For companies that generate a net loss during the current period, the closing entries will result in a net ____ entry to RE
debit
The adjusting entry to record revenue for services which seller has performed its obligation but has not yet been billed the customer requires
debit A/R credit service revenue
Adjusting entry for gift card
debit deferred revenue 500 credit service revenue 500
Adjusting entry for truck
debit depreciation expense 4,000 credit accumulated depreciation 4,000
Accrued revenue
earn revenue in current period but will receive cash later
Balance sheet on truck
equip. 20,000 less: acc. depr. (4,000) book value: 16,000
Deferred revenue
receiving cash in advance from customers creates a liability
At the end of the accounting period, adjusting entries are required. Order is:
-Use unadjusted trial balance to determine accounts required adjustment -record and post adjusting entries -prepare adjusted trial balance to check equality of debits and credits -prepare financial statements -record closing journal entries and post to accounts -prepare post-closing trial balance
Whats the effect of Dec. 31 adjusting entry to record $400 of revenue for which the seller has performed for customers but not yet collected?
A/R increased by $400 Sales revenue increased by $400
2 accounts are used to record adjusting entry for amortization of long-term assets that lack physical substance?
Accumulated amortization & amortization expense
At the end of sept. $3000 in salaries expense has been incurred that won't be paid until October
Adjusting entry: Credit salary expense 3,000 Debit salaries payable 3,000
On Dec. 1, start audit that will take 3 months, co. will get paid $100,000 when the job is completed. At the end of December, 20% of the work is complete.
Adjusting entry: credit A/R 20,000 debit service revenue 20,000
What type of transaction represents accrual adjustments?
Increase to income taxes payable & increase to income taxes expense
Which of the following transactions constitutes an accrual adjustment involving a revenue account?
Interest revenue on a note receivable
Accrual Adjustments
Revenue or expense happens first, cash will be received or paid later
The accrual adjustment recorded to adjust for revenues not yet collected will cause
assets to increase
The adjusting entry to record interest owed on obligations at the end of the accounting period includes:
a debit to interest expense a credit to interest payable
Permanent accounts
balance sheet accounts whose balances are carried forward to the next accounting period ex. Retained Earnings
The A/R account should be ___ when adjusting at the end of the period for any revenues from fulfilling obligations to buyers which has not yet been collected or recorded
increased
Accrued expenses(wages, interest, income tax)
incur expenses in current period to be paid for later
After adjustments have been completed, the adjusted balance in "salaries and wages payable" account represents wages incurred, but not yet ____by the company
paid
EVERY adjusting entry will include
revenues or expenses (income statement) or asset and liability (balance sheet)
Adjusting entries are necessary whenever we have...
revenues or expenses that cover multiple accounting periods