chapter 3 smart book

Purpose of post closing trial balance

- One purpose is to verify that total debits equal total credit for permanent accounts. - One purpose is to verify that all temporary accounts have zero balances. It is a listing of all permanent accounts and their balances after closing.

Expense recognition principle (matching principle)

- Prescribes expenses to be reported in the same period as the revenues that were earned as a result of the expenses. - Expenses should be matched in the same accounting period as the revenues that are recognized as a result of those expenses. - Matching of expenses with revenues is a major part of the adjusting process.

Describe the general ledger after adjusting and closing entries have been posted

- The abbreviations "adj." and "clos." have been entered in the explanation columns of the ledger. - All expense accounts will show a $0 balance after closing. - The Dividends account will have a $0 balance after closing. - The Income Summary account will show three closing entries.

true statements about timeliness and the importance of periodic reporting

- The value of information is often linked to its timeliness. - Useful information must reach decision-makers frequently and promptly. - Businesses report financial information at regular intervals to ensure timeliness of data.

unearned revenues can be

- They are reported on a balance sheet. - They refer to cash received in advance of performing a service or product. - They are also called deferred revenues. - They are a liability.

examples of adjustments to make

- a 24-month insurance policy was prepaid - An advance payment was received from a customer earlier in the month, but only partially earned by the end of the month. - Supplies were purchased at the beginning of the year, but not all were used. - Six months of rent were paid in advance. - Equipment was purchased in the middle of the year.-

the closing process

- the closing process resets the balances in temporary accounts to zero. - the closing process helps to summarize a period's revenues and expenses.

process for adjusting entries

1. determine what the current account balance equals 2. determine what the current account balance should equal 3. record an adjusting entry to get from step 1 to step 2

order of preparing a financial statement

1. income statement 2. statement of retained earnings 3. balance sheet 4. statement of cash flow

Depreciation

A decrease or loss in value

fiscal year

A fiscal period consisting of 12 consecutive months.

the book value (or net amount) of an asset

Book value is the original cost of an asset minus its accumulated depreciation. - The formula is Cost less Accumulated depreciation. - It is the original cost of an asset minus its accumulated depreciation. - It is sometimes referred to as the net amount of an asset.

For the current year, Bubbles Office Supply had earned $600 of interest on investments. As of December 31, none of this interest had been received or recorded. Demonstrate the required half of the adjusting entry by choosing the correct statement below.

Debit Interest receivable for $600.

annual financial statements

Financial statements covering a one-year period; often based on a calendar year, but any consecutive 12-month (or 52-week) period is acceptable.

interim financial statements

Financial statements covering periods of less than one year; usually based on one-, three-, or six-month periods.

what could be considered prepaid expense or prepaid asset account

Prepaid rent Prepaid insurance Supplies

Explain the difference between the unadjusted and the adjusted trial balance.

The adjusted trial balance is prepared after adjusting entries have been recorded and posted. - The adjusted trial balance generally has more accounts listed than the unadjusted trial balance. - The adjusted trial balance is used to prepare financial statements. - The adjusted trial balance is a list of accounts and their balances after adjusting entries have been posted.

A 12-month insurance policy was purchased on Dec. 1 for $4,800 and the Prepaid insurance account was initially increased for the payment. The required adjusting journal entry on December 31 includes a: (Check all that apply.)

credit to Prepaid insurance for $400. debit to Insurance expense for $400.

An advance payment of $1,000 for services was received on December 1 and was recorded as a liability. By the end of the year, $400 had been earned. Demonstrate what the correct adjusting entry should include by choosing the correct statement below.

debit unearned revenues for $400

Demonstrate your knowledge of a depreciation adjusting entry by completing the following sentence. A depreciation adjustment would include a debit to _________________ depreciation expense/accumulated depreciation/building) and _________________ (debit/credit) to _____________ (depreciation expense/accumulated depreciation/building).

depreciation expense credit accumulated depreciation

Framework for Adjustments

four types of adjustments exist for transactions and events that extend over more than one period deferral of expenses deferral of revenue accrued expenses accrued revenue

For the current year, a business has earned (but not recorded or received) $200 of interest from investments. Demonstrate the required adjusting entry by completing the following sentence. The required adjusting entry would be to debit the ________________ (Unearned revenue/Accounts receivable/Cash/Interest receivable) account and credit the ________________ (Cash/Accounts receivable/Interest revenue/Interest receivable) account.

interest receivable interest revenue

plant assets

long term tangible assets used to produce and sell products and services, provide benefits for more than one period - It is reported on the balance sheet. - Its original cost (minus any salvage value) is expensed over its useful life. - It is a tangible long-term asset. - It has a life within the business greater than one year or the current operating cycle, whichever is longer. - ex: equipment, machinery, building, land

Revenue Recognition Principle

the principle prescribing that revenue is recognized when goods and services are delivered to customers

which is (are) correct regarding an adjusted trial balance and how it is used In preparing financial statements.

- The adjusted trial balance includes all accounts and balances appearing in financial statements. - The income statement is the first financial statement prepared after preparing the adjusted trial balance. - The ending Retained Earnings account balance on the balance sheet is transferred from the statement of retained earnings. - Financial statements are easier to prepare using the adjusted trial balance than the general ledger.

A classified balance sheet can be described as a balance sheet that

- lists current assets in the order of how quickly they can be converted to cash. - is more useful to decision-makers. - organizes assets and liabilities into important subgroups. some groups could be (in order) 1. current assets 2. long term investments 3. plant assets 4. intangible assets 5. current liabilities 6. long term liabilities

order of adjusting entries

1. prepare an unadjusted trial balance 2. journalize and post adjusting entries 3. prepare an adjusted trial balance 4. prepare financial statement

Sheldon Company had $500 for one day of accrued salaries on December 31 of the prior year. On January 4 of the current year, total salaries for the five-day week are paid. The journal entry to record the payment of salaries on January 4 includes:

Debit to Salaries Payable for $500; Debit to Salaries Expense for $2,000

Time Period Assumption

Presumes that the life an organization can be divided into time periods, such as months and years.

current assets

assets to be sold, collected, or used within one year; example: cash, short term investments, accounts receivable, short term notes receivable, merchandise, inventory, prepaid expenses

The journal entry to close all of a company's expense accounts would include a ___________________ (debit/credit) to each of the expense accounts and a corresponding ___________________ (debit/credit) to the Income ___________________ (statement/summary) account.

credit debit summary

what is an examples of a temporary account and what is a description of a temporary account

income statement dividends income summary expenses revenues - A temporary account is closed at the end of an accounting period. - A temporary account has a balance for only one period.

A 12-month insurance policy was purchased on Dec. 1 for $3,600 and the Prepaid insurance account was increased for the payment. Demonstrate the required adjusting journal entry on Dec. 31 by selecting from the choices below.

insurance expense would be debited for $300

accounting period (or reporting)

length of time covered by financial statements, also called reporting period

intangible assets

long-term assets (e.g., patents, trademarks, copyrights) that have no real physical form but do have value

Examples of accounts which require adjusting at the end of the accounting period

never cash accounts - Unearned revenue - Supplies - Prepaid rent

Complete the following statement. The purpose of the closing process is to reset ________________(temporary/permanent) account balances to zero and to transfer the changes in all of these accounts to the Retained ________________(Earnings/Summary/Withdrawal) account.

temporary earnings

contra account

the account linked with another account and having an opposite balance; reported as a subtraction from the other - Accumulated Depreciation is an example of a contra account. - A contra account would be subtracted from another account. - A contra account has an opposite normal balance than its linked account. - A contra account is linked with another account.

salaries payable account

the amount owed to employees and is a liability - It is increased with a credit. - It is reported on the balance sheet. - It reports amounts owed to employees. - It is a liability account.

what does "closing" mean

to bring an account balance to zero

the income summary account can be defined as....

- A temporary account - An account used during the closing process to summarize revenues and expenses - An account that contains a credit for the sum of all revenues - An account whose balance equals net income or net loss

Choose the statement below that demonstrates the correct adjusting entry to recognize depreciation expense on a building.

Debit Depreciation expense; credit Accumulated depreciation.

Define "current" as it applies to assets and liabilities on a classified balance sheet.

Current items are those expected to come due within one year or the company's operating cycle, whichever is longer. and are listed in order of how quickly they could be converted to or paid in cash Accounts receivable Cash Office supplies Prepaid rent

Review and complete the following statement regarding the Income Summary account. The Income Summary account is _____________ (debited/credited) for the sum of all revenue accounts and is _____________(debited/credited) for the sum of all expense accounts and its balance will be transferred to the _____________ (Retained Earnings/Cash) account.

credited debited retained earnings

StoryBook Company provided services to several customers during the month of December. These services have not yet been paid by the customers. StoryBook should record the following adjusting entry at the end of December:

debit accounts receivable credit services revenue

The closing process takes place at the __________(end/beginning) of an accounting period, after the ___________ (adjusted/unadjusted) trial balance is prepared and ____________(after/before) the financial statements are prepared.

end adjusted after

accrued revenue

revenues earned in a period that are both unrecorded and not yet received in cash or other assets - Accounts receivable is usually increased when accruing revenues. - The adjustment causes an increase in an asset account and an increase in a revenue account. - They refer to earnings which have been earned but not yet billed. - They refer to revenues that are earned in a period, but have not been received and are unrecorded.

which accounts could be considered prepaid expense

supplies

$800 of supplies were purchased at the beginning of the month and the Supplies account was increased. As of the end of the period, $200 of supplies still remain. Which of the following is the correct adjusting entry?

supplies expense would be debited for $600

A post-closing trial balance is a list of ______________________ (permanent/temporary) accounts and their balances from the ______________________ (journal/ledger) a ______________________ (after/before) all ______________________ (adjusting/closing) entries have been journalized and posted.

permanent ledger after closing

Chimney Sweeps provided chimney cleaning services to several clients during the month of February. Chimney's customers have not yet been billed. Chimney's customers owe $2,000 to Chimney. How will Chimney Sweeps record this transaction?

Debit accounts receivable and credit services revenue

$1,000 of cash was received in advance of performing services. By the end of the period, $300 had not yet been earned. (The Unearned revenue account was increased at the time of the initial cash receipt.) Demonstrate the required adjusting journal entry by selecting from the choices below.

Unearned revenue would be debited for $700. Service revenue would be credited for $700.

On December 27, a business completed a $400 service that had not yet been billed or recorded as of December 31. Demonstrate the required adjusting entry of the business by completing the following sentence. The required adjusting entry would be to debit the _________________(Unearned revenue/Accounts receivable/Cash/Service revenue) account and credit the _______________(Unearned revenue/Accounts receivable/Cash/Service revenue) account.

accounts receivable service revenue

Accrual Basis Accounting

- Records revenues when services and products are delivered and records expense when incurred (matched with revenues) - An accounting system that uses the matching principle to determine when to recognize revenues and expenses. - An accounting system that uses the adjusting process to recognize revenues when earned and expenses when incurred. - An accounting system which is consistent with generally accepted accounting principles.

On December 28, I. Greasy Catering Company completed $600 of catering services. As of December 31, the customer had not been billed nor had the transaction been recorded. Demonstrate the required adjusting entry by choosing the correct statement below.

Debit Accounts receivable for $600.

Which of the accounts below would appear in the equity section of a classified balance sheet?

retained earnings

A company borrowed $4,000 from the bank at an interest rate of 9%. By the end of the accounting period, the loan had been outstanding for 30 days. Demonstrate the required adjusting entry by choosing the correct statement below.

Debit Interest expense for $30.

McDarrel's records $500 of accrued salaries on December 31. Three days later, on January 3, total salaries of $4,000 (including the $500 accrued at year end) are paid. Demonstrate the required journal entry on January 3 by selecting from the choices below. (Check all that apply.)

Salaries expense would be debited for $3,500. Cash would be credited for $4,000. Salaries payable will be debited for $500.

$1,000 of supplies were purchased at the beginning of the month. $300 were used during the month. (The Supplies account was increased at the time of the initial purchase.) Demonstrate the required adjusting journal entry by selecting from the choices below. (Check all that apply.)

Supplies expense would be debited for $300. Supplies would be credited for $300.

the accounting cycle...

The accounting cycle is repeated each reporting period and refers to the steps taken in preparing financial statements. - The accounting cycle is a series of steps repeated each reporting period. - The accounting cycle refers to steps followed by a company to prepare its financial statements. - The cycle contains steps for adjusting and closing accounts. - The accounting cycle contains 10 steps.

what is an examples of permanent accounts and what is a description of a permanent account

asset liability equity common stock retained earnings accounts payable accumulated depreciation - A permanent account is reported on the balance sheet. - A permanent account's balance is carried forward to the next accounting period.

A company borrowed $10,000 from the bank at 5% interest. The loan has been outstanding for 45 days. Demonstrate the required adjusting entry for this company by completing the following sentence. The required adjusting entry would be to debit the Interest (expense/payable/receivable) ____________ account and (debit/credit)___________ the Interest _______________ (expense/payable/receivable) account.

expense credit payable

accrued expenses

the cost that is incurred in a period that is both unpaid and unrecorded Adjustments involve increasing both an expense and a liability account. They are reported on an income statement. examples: wages salaries intrest rent taxes

Accumulated Depreciation

the cumulative sum of all depreciation expense recorded for an asset The account allows both the original cost of plant assets and the total depreciation is taken to be shown simultaneously. - Accumulated depreciation is a contra account. - Accumulated depreciation is subtracted from its plant asset on the balance sheet. - Accumulated depreciation accumulates the total depreciation taken on an asset since its purchase. - The Accumulated depreciation account allows the original cost of the asset to remain in the plant asset account.