ACCT 201 CH3
In what two cases are adjusting entries unnecessary?
1) for transactions that do not involve revenue or expense activities 2) for transactions that involve revenues or expenses being recorded at the same time as the cash flow
when recording an adjustment for the use of equipment during the current accounting period, which two accounts are effected?
accumulated depreciation, depreciation expense
deferred revenue
amounts collected in advance of being earned are recorded as deferred revenues. (unearned revenue)
contra account
an account with a balance that is opposite (contra) to that of its related accounts
what does the balance sheet include?
assets, liabilities, stockholder's equity
prepaid expenses
cost of assets acquired in one period that will be expensed in a future period
when a bank receives $ from interest
debit interest receivable, credit interest revenue
book value
equals original cost of an item minus the accumulated depreciation
matching principle
expenses are typically reported in the same period as the revenues they help generate (think cause and effect)
accrued interest formula
interest = amount of notes payable x annual interest rate x fraction of the year
accrual-basis accounting
recording revenues when they are earned (revenue recognition) and we record expenses with related revenues (expense recognition)
what is the difference between accrual-basis net income and cash-basis net income?
the difference between the two methods is the timing of when we record revenues and expenses
depreciation
the process of allocating the cost of an asset, such as equipment to expense over the assets' useful life
revenue recognition principle
we record revenue at the time it is earned, not necessarily when cash is received.
Adjusting entry for a prepaid expense includes a debit and a credit to what?
a debit to an expense account (increase an expense), a credit to an asset account (decrease an asset)
accrued expense
when a company has a cost but hasn't yet paid cash or recorded an obligation to pay for that cost, it should still record the cost as an expense and also a liability for the amount owed.
accrued revenue
when a company has earned revenue but hasn't yet received cash or recorded an amount receivable, it should still record the revenue and an asset for the amount expected to be received.
unearned revenues
when a company receives cash for a service it hasn't provided yet. debit cash; credit liability
adjusting entries
when we record events that have occurred but that we have not recorded yet necessary for accrual-basis accounting
cash-based accounting
revenues and expenses are recorded at the time we receive or pay cash.
What does the income statement include?
revenues and expenses that effect net income over a period of time