CH 4 Notes

Assume that in the current year a company performed $100 of services for a client but only $30 was collected in cash at the time the services were performed. This transaction would be recorded in the horizontal model with:

+30 Cash and +70 Accounts Receivable in the Assets column and +100 Service Revenue in the Revenues column.

Which of the following entries can be recorded as an accrual adjusting entry?

Dr. Interest Receivable 200 Cr. Interest Income 200

Which of the following entries can be recorded as a reclassification adjusting entry?

Dr. Supplies 300 Cr. Supplies Expense 300

Which of the following entries can be recorded as an accrual adjusting entry?

Dr. Wages Expense 100 Cr. Wages Payable 100

Which of the following groups of accounts would be closed in the year-end closing process?

Insurance Expense, Service Revenue, Loss on Sale of Equipment, and Sales

An (accrual/reclassification) period-end adjustment is required when a revenue has been earned but not yet received in cash.

accrual

An (accrual/reclassification) period-end adjustment is required when an expense has been incurred but not yet paid in cash.

accrual

Identify a correct statement regarding the usage of plus or minus signs along with the dollar amounts in the horizontal model of financial statements.

A minus sign for expenses indicates that net income is reduced because expenses are higher.

Which of the following are acceptable/correct expressions of the balance sheet equation?

Assets = Liabilities + Paid-in capital + Retained earnings Assets = Liabilities + Paid-in capital + Retained earnings (beginning of period) + Revenues (during the period) - Expenses (during the period) Assets - Liabilities = Stockholders' equity Assets = Liabilities + Stockholders' equity

Which of the following accounts would be closed during the year-end closing process?

Rent Expense Service Revenue Cost of Goods Sold Gain on Sale of Land Dividends Wages Expense Rent Expense Sales Loss on Sale of Buildings

Which of the following transactions would require a reclassification adjusting entry?

Rent received in advance Prepaid insurance

Assets = liabilities + stockholders equity

assets = liabilities + paid-in capital + retained earnings ALSO FURTHER BROKEN DOWN AS... assets = liabilities + paid-in capital + retained earnings (beginning of period) + revenues (during the period) - expenses (during the period)

When a bank _____ your account for the interest earned during the month what it is really communicating is that is is _____ the ______ recorded in its accounting records to represent your account from its perspective

credits, decreasing, liability

Journal

day to day chronological record of transactions

In bookkeeping and accounting...

debit means left, credit means right

Although revenues and expenses are reported on the income statement, they also:

impact stockholders' equity on the balance sheet.

Debit entries:

increase asset accounts and decrease liability and stockholders' equity accounts.

Account Balance

the arithmetic sum of the additions and subtractions to an account through any given date

Charge an account

to make a debit entry to the account (synonym for debit)

True or false: The key to using the horizontal model is to keep the balance sheet in balance.

true

In the closing process, all income statement accounts (revenues, expenses, gains, and losses) and dividends are closed. What is the name of the account in which all the aforementioned accounts are closed into?

Retained Earnings

Assume that in the current year a company collected $70 in cash from a customer for services that were performed in a prior period. This transaction would be recorded in the horizontal model with:

+70 Cash and -70 Accounts Receivable in the Assets column.

If debits equal credits, then:

- assets will equal the sum of liabilities and stockholders' equity. - the company's balance sheet equation will be in balance.

Liability Accounts....

- decrease with debit entries - increase with credit entries - normally have a credit balance

A chart of accounts:

- is usually sequenced with assets listed first, followed by liabilities, stockholders' equity, revenues, and expenses. - will differ for each company, depending on the nature of their transactions and the kinds of accounts used in their bookkeeping system. - serves as an index to a company's ledger.

T- account

- left side, debit side - right side, credit side -nothing else

Identify the statements that are correct about reclassification year-end adjustments.

-A reclassification year-end adjustment is required when cash for a revenue has been received but the revenue has not been recognized yet. -A reclassification year-end adjustment is required when cash has been paid for an expense but the expense has not been incurred yet.

Which of the following statements regarding the closing process are true?

-All revenue accounts are closed by debiting each account for an amount equal to the adjusted year-end credit balance. -Losses and dividends are closed in the same way that expenses are closed. -All expense accounts are closed by crediting each account for an amount equal to the adjusted year-end debit balance.

Identify the statements that are correct about accrual year-end adjustments.

-An expense is accrued when the expense has been incurred but not yet paid for in cash. -A revenue is accrued when the revenue has been earned but not yet received in cash.

Transactions

-can be seen as the bricks that build financial statements -are summarized in accounts, and accounts are further summarized in financial statements - are the starting point in the accounting process that ends with the preparation of financial statements -are economic interchanges between entities

Revenue and gain accounts:

-increase with credit entries -normally have a credit balance -decrease with debit entries

Under accrual accounting, year-end adjustments are made: (Select all that apply).

-to ensure that expenses are recognized in the year in which they are incurred. -because revenue receipts may occur before or after the event that causes revenue recognition. -to ensure that revenues are recognized in the year in which they are earned.

Which of the following statements is true regarding the closing process?

All expense and loss accounts, as well as dividends, are credited for amounts equal to their year-end debit balances.

Which of the following statements are true regarding the closing process?

All revenue and gain accounts are debited for amounts equal to their year-end credit balances. All expense and loss accounts, as well as dividends, are credited for amounts equal to their year-end debit balances.

Merchants who send you a notice that they have "charged" your account are really communicating that they have:

debited your account to increase your account balance, which is shown as an asset (accounts receivable) in their accounting records.

When a bank _____ your account for the service changes incurred during the month, what it is really communicating is that is is _____ the ______ recorded in its accounting records to represent your account from its perspective

debits, decreasing, liabilities

Credit entries:

decrease asset accounts and increase liability and stockholders' equity accounts.

When a bank debits your account for the service charges incurred during the month, what it is really communicating is that it is:

decreasing your account balance, which is shown as a liability from its perspective.

Journal Entry

description of a transaction in a format that shows the debit accounts and amounts and credit accounts and amounts

transactions

economic interchanges between entities that are accounted for and reflected in financial statements (financial statements are made up of these)

Normal account balances for:

expense and loss accounts are on the debit side, and the balances for revenue and gain accounts are on the credit side.

Debit entries...

increase expense and loss accounts and decrease revenue and gain accounts.

Stockholders' equity accounts:

increase with credit entries normally have a credit balance decrease with debit entries

When a bank credits your account for the interest earned during the month, what it is really communicating is that it is:

increasing your account balance, which is shown as a liability from its perspective.

Transactions are initially recorded in a.....

journal

After transactions have been recorded in a journal, they are posted to a.....

ledger

When using the horizontal model, the arrow from net income to stockholders' equity indicates that:

net income affects retained earnings, which is a component of stockholders' equity.

The report format of the balance sheet:

presents assets above liabilities and stockholders' equity items.

The account format of the balance sheet:

presents assets on the left and liabilities and stockholders' equity items on the right.

An (accrual/reclassification) period-end adjustment is required when the cash related to a revenue has been received but the revenue has not yet been recognized.

reclassification

In the horizontal model, a minus sign next to an expense amount means that the net income is _____ because of expenses being ________

reduced, higher

Accounts are summarized in financial _______ whereas ______ are summarized in accounts

statements, transactions