ACCt 3311 chapter 3

Identifying and Recording Transactions and Other Events

FASB: "transactions and other events and circumstances that affect a business enterprise" types of events: external: between an entity and its environment internal: event occurring entirely within an entity

which of the following is an example of an accrued liability?

b; property taxes incurred during the year, to be paid in the first quarter of the subsequent year

The debit and credit analysis of a transaction normally takes place

before an entry is recorded in a journal

it is not necessary to post the closing entries to the ledger accounts because new revenue and expense accounts will be opened in the subsequent accounting period

false; failure to post closing entries to the general ledger will leave a balance in revenue and expense accounts from a previous period and the retained earnings account will be misstated

adjusting entries are an optional step in the accounting process

false; adjusting entries are necessary in order for revenues to be recorded in the period in which services are performed and for expenses to be recognized in the period in which they are incurred and to achieve an accurate statement of assets, liabilities, and equities at the end of the period

An adjusted trial balance that shows equal debit and credit columnar totals proves the accuracy of the adjusting entries.

false; an adjusted trial balance show equal debit and credit columnar totals proves nothing more than the fact that each adjusting entry contained an equal amount of debits and credits. adjusting entries could have included the wrong total dollar amount or an inappropriate account could have been debited/credited. mistakes such as these would still produce an adjusted trial balance that shows equal debit/credit column totals

which of the following errors will cause an imbalance in the trial balance?

listing the balance of an account with a debit balance in the credit column of the trial balance

an accrued expense can best be described as an amount

not paid and currently matched with earnings

which of the following is a recordable event or item

payment of monthly payroll

real account

permanent account such as asset, liability and equity accounts; they appear on the balance sheet. companies do not close these accounts.

when an expense is paid in cash before it is used, it is called a

prepaid expense

unearned revenues

receipt of cash before the services are performed is recorded as a liability; cash receipt before revenue recorded examples of unearned revenue that occur: rent airline tickets tuition magazine subscriptions customer deposits

which of the following is a nominal account

salaries and wages expenses

a prepaid expense can best be described as an amount

b; paid and not currently matched with earnings

rent collected in advance by a landlord is a

d unearned revenue

A trial balance may prove that debits and credits are equal, but

-an amount could be entered in the wrong account -a transaction could have been entered twice -a transaction could have been omitted

adjusting entries are necessary to

-obtain a proper matching of revenue and expense -achieve an accurate statement of assets and equities

which of the following criteria must be met before an event or item should be recorded for accounting purposes?

-the event or item can be measured objectively in financial terms -the event or item is relevant and reliable -the event or item is an element

accounting cycle summarized

1. Enter the transactions of the period in appropriate journals. 2. Post from the journals to the ledger (or ledgers). 3. Take an unadjusted trial balance (trial balance). 4. Prepare adjusting journal entries and post to the ledger(s). 5. Take a trial balance after adjusting (adjusted trial balance). 6. Prepare the financial statements from the second trial balance. 7. Prepare closing journal entries and post to the ledger(s). 8. Take a post-closing trial balance (optional). 9. Prepare reversing entries (optional) and post to the ledger(s).

posting closing entries

1. close revenues to income summary 2. close expenses to income summary 3. close income summary to retained earnings 4. close dividends to retained earnings

posting expanded

1. in the ledger, in the appropriate columns of the account debited, enter the date, journal page, and debit amount shown in the journal 2. in the reference column of the journal, write the account number to which the debit amount was posted 3. in the ledger, in the appropriate columns of the accounts credited, enter the date, journal page, and credit amount shown in the journal 4. in the reference column of the journal, write the account number to which the credit amount was posted

event

A happening of consequence. An event generally is the source or cause of changes in assets, liabilities, and equity. Events may be external or internal.

transaction

An external event involving a transfer or exchange between two or more entities.

types of adjusting entries

Deferrals (cash has been paid/exchanged but not consumed): Prepaid Expenses--expenses paid in cash before they are used or consumed Unearned Revenues--cash received before services are performed Accruals (cash has not been paid but has been consumed): Accrued Revenues--revenues for services performed but not yet received in cash or recorded Accrued Expenses--expenses incurred but not yet paid in cash or recorded

adjusting entries

Entries made at the end of an accounting period to bring all accounts up to date on an accrual basis, so that the company can prepare correct financial statements

accrued revenues

Revenues recognized but not yet received in cash or recorded at the statement date. revenue recorded before cash receipt examples: rent interest services performed

nominal accounts

Temporary accounts that are closed after each accounting cycle, such as revenue, expense and dividends accounts.

trial balance

The list of all open accounts in the ledger and their balances. The trial balance taken immediately after all adjustments have been posted is called an adjusted trial balance. A trial balance taken immediately after closing entries have been posted is called a post-closing (or after-closing) trial balance. Companies may prepare a trial balance at any time.

financial statements and ownership structure

The stockholders' equity section of the balance sheet reports common stock and retained earnings. The income statement reports revenues and expenses. The statement of retained earnings reports net income/loss and dividends. Because a company transfers dividends, revenues, and expenses to retained earnings at the end of the period, a change in any one of these three items affects stockholders' equity.

journalizing

a company records in accounts those transactions and events that affect assets, liabilities, equities, revenues, and expenses general journal--a chronological record of transactions; general ledger; contains all the asset, liability, and equity, revenue and expense accounts

an adjusting entry should never include

a debit to an expense account and a credit to a revenue account. all adjusting entries include one balance sheet account and one income statement account.

ledger

a general ledger is a collection of all the assets, liabilities, stockholder's equity, revenue and expense accounts; a subsidiary ledger contains the details related to a given general ledger account

account

a systematic arrangement that shows the effect of transactions and other events on a specific element; also known as T account

at the time a company prepays a cost

a. it debits an asset account to show the service or benefit it will receive in the future.

if the following journal entry was made for the purchase of a three year insurance policy in February of the first year, would an adjusting entry and/or a reversing entry be appropriate at the end of the first year

a; adjusting entry yes, reversing entry no

adjusting entries expanded

adjusting entries make it possible to: -report on balance sheet appropriate assets, liabilities, and stockholder's equity at statement date -report on income statement proper revenues and expenses for the period -are required every time a company prepares financial statements

The failure to properly record an adjusting entry to accrue an expense will result in an

an understatement of liabilities and expenses; failure to accrue a revenue will result in an understatement of revenues and an understatement of assets

prepaid expenses

assets paid for and recorded before a company uses them; cash payment before expense recorded; examples of prepayments that often occur: insurance supplies advertising rent building/equipment

during the first year of wisnewski co's operations, all purchases were recorded as assets. store supplies in the amount of 6,540 were purchased. actual year end store supplies inventory amount to 2150. the adjusting entry for store supplies will:

b; increase expenses by 4390

when a company makes reversing entries

b; it debits all cash payments of expenses to the related expense account

An accrued expense can best be described as an amount

b; not paid and currently matched with earnings

accrued expenses

expenses incurred but not yet paid in cash or recorded; expense recorded before cash payment examples: rent interest taxes salaries

which of the following is correct regarding double entry accounting?

c; each transaction must result in equal amounts of debits and credits; the double entry system records the dual effect of each transaction and every transaction must be recorded with equal debits and credits

a trial balance prepared at the year end showed Puccineli Co's debit total exceeding the credit total by 6300; this discrepancy could have been caused by

c; the balance of 700 in the equipment account being entered as a debit of 7000

which of the following statements best describes the purpose of closing entries

c; to reduce the balances of revenue and expense accounts to zero so that they may be used to accumulate the revenues and expenses of the next period

which of the following journal entries is appropriate when a company receives payment in advance for goods or services

c;debit cash and credit a liability account; an advance payment for goods or services requires a debit to cash and a credit to a liability account. when the goods or services are delivered to the customer, the revenue is recognized by debiting the liability and crediting a revenue account

which of the following properly describes a deferral

cash is received before revenue is recognized

An unearned revenue can best be described as an amount

collected and not currently matched with expenses

accounting information system

collects and processes transaction data and then disseminates the financial information to interested parties helps management answer questions: -how much and what kind of debt is outstanding? -were sales higher this period than last? -what assets do we have? -what were our cash inflows and outflows? -did we make a profit last period? -are any of our product lines or divisions operating at a loss? -can we safely increase our dividends to stockholders? -is our rate of return on net assets increasing?

bad debts (accrued expenses)

companies estimate uncollectible accounts at the end of each period; this ensure that receivables are reported on the balance sheet at their net realizable value at the end of the period, bad debts expense is debited and the contra asset Allowance for Doubtful Accounts is credited (increased)

Murphy Company sublet a portion of its warehouse for five years at an annual rental of $30,000, beginning on May 1, 2012. The tenant, Sheri Charter, paid one year's rent in advance, which Murphy recorded as a credit to Unearned Rent Revenue. Murphy reports on a calendar-year basis. The adjustment on December 31, 2012 for Murphy should be

d

a worksheet

d; a worksheet provides considerable assurance the company properly handled all of the details related to end of period accounting

which of the following is not a principal purpose of an unadjusted trial balance

d; it proves that debits and credits were properly entered in the ledger accounts; the trial balance accomplishes the things listed in the first three alternatives. however, the purpose of the trial balance is not to prove that the debits and credits were properly entered into the ledger accounts. the fact that the trial balance is in balance proves than an equal amount of debits and credits were made, but there is no assurance that the posting were made to the correct account

with regard to the accounting cycle, which of the following pairings of activities provides a correct chronology

d; transactions are journalized and later posted to the ledger

if expenses are greater than revenues, the income summary account will be closed by a debit to

d;; retained earnings and a credit to income summary; if expenses are greater than revenues, then the income summary account will have a debit balance after closing entries have been made;

a journal entry to record the sale of a inventory on account will include a

debit to Accounts Receivable

if an entity fails to post one of its journal entries to its general ledger, the trial balance will not show an equal amount of debit and credit balance accounts

false; failure to post one journal entry to the general ledger will misstate the debit and credit side of a trial balance by the same amount. thus, the trial balance will show an equal amount of debits and credits.

adjusting entries are used to correct errors that occur during the posting process

false; if errors are made in the posting process, they are corrected by means of correcting entries, not adjusting entries

In general, debits refer to increases in account balances, and credits refer to decreases.

false; it depends on the account's normal balance

the income summary account used during the closing process is shown in the stockholder's equity section of the balance sheet

false; it is closed to retained earnings and never appears on a financial statement

the post closing trial balance consists of asset, liability, stockholders equity, revenue and expense accounts

false; revenue and expense accounts are closed out

Reversing entries are made at the end of the accounting cycle to correct errors in the original recording of transactions.

false; reversing entries are made to simplify the recording of a subsequent transaction related to an adjusting entry. when an entry is reversed, the related subsequent transaction can be recorded as if the adjusting entry had never been recorded. reversing entries have nothing to do with the correction of errors.

a general journal may be used by any entity in recording its transactions, whereas special journals may be used only by entities whose transactions meet certain requirements

false; special journals can be used by any entity for any groups of transactions possessing common characteristics

an example of an internal event would be a flood that destroyed portion of an entity's inventory

false; this statement characterizes an external event rather than an internal event. internal events occur within an entity, whereas external events involve interaction between an entity and its environment

Real (permanent) accounts are revenue, expense, and dividend accounts and are periodically closed.

false; those are temporary/nominal accounts

trial balance expanded

list of accounts and their balances at a given time usually prepared at end of an accounting period lists accounts in order they appear in ledger, with debit balances listed in left column and credit balances in the right column totals of the two columns must agree proves mathematical equality of debits and credits after posting also uncovers errors in journalizing and posting does not prove that a company recorded all transactions or that the ledger is correct. trial balance may balance even when mistakes occur: -fails to journalize a transaction -omits posting a correct journal entry -posts a journal entry twice -uses incorrect accounts in journalizing or posting -makes offsetting errors in recording the amount of a transaction

financial statements

statements that reflect the collection, tabulation, and final summarization of the accounting data; 1. balance sheet shows the financial condition of the enterprise at the end of the period 2. income statement: measures the results of operations during the period 3. statement of cash flows: cash provided and used by operating, investing, and financing activities during the period 4. the retained earnings statement reconciles the balance of the retained earnings account from the beginning to the end of the period

nominal accounts are also called

temporary accounts

journal

the "book of original entry" where the company initially records transactions and selected other events; nothing goes into a ledger that doesn't come through a journal;

closing entries

the formal process by which the enterprise reduces all nominal accounts to zero and determines and transfers the net income or net loss to an owners' equity account

depreciation

the process of allocating the cost of an asset to expense over its useful life in a rational and systematic manner; accumulated depreciation is a contra asset that offsets an asset account on the balance sheet the book value of any depreciable asset is the difference between its costs and its related accumulated depreciation

post closing trial balance

the purpose is to prove the equality of the permanent account balances that the company carries forward into the next period; since all temporary accounts have been closed, the post closing trial balance will only contain permanent/real/balance sheet accounts

the accounting equation must remain in balance

throughout each step in the accounting cycle.

why are certain costs of doing business capitalized when incurred and then depreciated or amortized over subsequent accounting cycles?

to match the costs of production with revenues as recognized

closing entries expanded

to reduce balance of nominal/temporary accounts to zero in order to prepare accounts for next period's transactions -to transfer all income statement account balances to the retained earnings account in owner's equity -balance sheet (asset, liability, equity) accounts are NOT closed -dividends are closed directly to the retained earnings account

posting

transferring information from a journal entry to a ledger account

One purpose of a trial balance is to prove that debits and credits are equal in the general ledger.

true

a worksheet completed through the adjusted trial balance column provides the information needed for preparation of the financial statements without reference to the ledger or other records

true

adjusting entries result from compliance with the revenue recognition and expense recognition principles

true

an adjustment for salaries and wages expense, incurred but unpaid at year end, is an example of an accrued liability

true

bad debts are recorded in the period in which the sale was made to ensure that receivables are reported at their net realizable value

true

double entry accounting is the process that leads to the basic equality in accounting expressed by the formula: assets = liabilities + stockholders' equity

true

in general, reversing entries are used for two types of adjusting entries: accrued revenues and accrued expenses

true

the interest expense account is credited during the closing process

true

the use of a worksheet at the end of each month or quarter permits the preparation of interm financial statements even though the books are closed only at the end of the year

true

use of reversing entries does not change the amounts reported in the financial statements for the previous period

true

when a revenue is collected and recorded in advance, it is normally accounted for as a -------------

unearned revenue