Financial & Managerial Accounting-Chapter 4

adjusting entries

Entries made at the end of the accounting period for the purpose of recognizing revenue and expenses that are not properly measured as a result of journalizing transactions as they occur. for example, overnight auto service purchased shop supplies that will be used for several months. Thus, an adjusting entry is required to record the expense associated with the shop supplies that overnight uses each month. indeed, some business activities affect the revenue and expenses of multiple accounting periods.(146)

adjusting entry/adjusting entry

Every ____________________ involves the recognition of either revenue or expenses. Revenue and expenses represent changes in owner's equity. However, owners equity cannot change by itself; there also must be a corresponding change in either assets or liabilities. Thus every ___________ affects both an income statement account (revenue or expense) and a balance sheet account (assets or liabilities). Rarely do adjusting entries include an entry to cash. It is important to recognize that none of the adjustments discussed in this chapter require a debit or a credit to cash. (148)

adjusting entries

In short, ______________ are needed whenever transactions affect the revenue or expenses of more than one accounting. these entries assign revenues to the period in which they are earned, and expenses to the periods in which related goods or services are used.for most companies, these entries are made on a monthly basis. (146)

adjusting entries

_____________ to convert assets to expenses result from cash being paid prior to an expense being incurred. (147)

adjusting entries

______________ to convert liabilities to revenue result from cash being received prior to revenue being earned. (147)

Depreciation/Depreciation/Depreciable/Depreciation

________________ is a non-cash expense. We have made the point that net income does not represent an inflow of cash or any other asset. Rather it is a computation of the overall effect of certain business transactions and owners equity. The recognition of ____________________ expense illustrates this point. As __________________ assets expire, ______________ expense is recorded, net income is reduced, and owners equity declines, but there is no corresponding cash outlay in the current period. For this reason, _________________ is called a non-cash expense. Often it represents the largest difference between net income in the cash flow from business operations. (155)

adjusting entries

__________________ to accrue uncollected revenue result from revenue being earned before cash is received. (147)

adjusting entries/adjusting entries

___________________ are based on the concepts of accrual accounting, not upon monthly bills or month and transactions. No one sends overnight auto service a bill saying, quote shop supply expense for the month is $500." Yet overnight must be aware of the need to record the estimated cost of shop supplies consumed if it is to measure income properly for the period. Making ____________ requires a greater understanding of accrual accounting concepts than does the recording of routine business transactions. (148)

adjusting entries

_____________________ entries are the means by which accounts apply the realization and matching principles. Through these entries, revenues are recognized as they are earned, and expenses are recognized as resources are used or consumed in producing the related revenue. In most cases, the realization principle indicates that revenue should be recognized at the time goods are sold or services are rendered. At this point the business has essentially completed the earning process in the sales value of the goods or services can be measured objectively. The matching principle underlie such accounting practices as depreciating plant assets, measuring the cost of supplies used, and amortizing the cost of unexpired insurance policies. (160)

adjusting entries

_____________s to accrue unpaid expenses result from expenses being incurred before cash is paid. (147)

converting liabilities to revenue

a business may collect cash in advance for services to be rendered in future accounting periods. Transactions of this nature are usually recorded by debiting cash in by crediting a liability account (typically called unearned revenue or customer deposits). Here, the liability account created represents the deferral (or the postponement) of revenue. the adjusting entry is recorded by debiting the liability (unearned revenue or customer deposits) and by crediting revenue earned for the value of the services. (147)

accrued revenue

a business may earn revenue during the current accounting period But not bill the customer until a future accounting period. this situation is likely to occur if additional services are being performed for the same customer, in which case the bill might not be prepared until all services are completed. Any revenue that has been earned but not recorded during the current accounting period should be recorded at the end of the. By means of an adjusting entry. This adjusting entry consists of a debit to an account receivable and a credit to the appropriate revenue account. The term _______________ often is used to describe revenue that has been earned during the period but that has not been recorded prior to the closing date. (158)

converting assets to expenses

a cash expenditure or cost that will benefit more than one accounting period usually is recorded by debiting an asset account (for example, supplies, unexpired insurance, and so on) and by crediting cash. the asset account created actually represents the deferral (or the postponement) of an expense. this adjusting entry is recorded by debiting the appropriate expense account (for example, supplies expense or insurance expense) and crediting the related asset account (for example, supplies were unexpired insurance). (147)

accumulated depreciation

a contra-asset account shown as a deduction from the related asset account in the balance sheet. Depreciation taken throughout the useful life of an asset is accumulated in this account. (154)

adjusted trial balance

a schedule indicating the balances in ledger accounts after end of. Adjusting entries have been posted. The amount shown in the adjusted trial balance are carried directly into financial statements.

unearned revenue

amounts collected from customers in advance are recorded by debiting the cash account in crediting an ______________ account. sometimes this is referred to as deferred revenue. (155)

contra-asset account

an account with a credit balance that is offset against or deducted from an asset account to produce the proper balance sheet amount for the asset. (154)

accruing unpaid expenses

an expense may be incurred in the current accounting period Even though no cash payment will occur until a future period. these accrued expenses are recorded by an adjusting entry made at the end of each accounting period. The adjusting entry is recorded by debiting the appropriate expense account ( for example, interest expense or salary expense) and by crediting the related liability (for example, interest payable or salaries payable). (147)

unearned revenue

an obligation to deliver goods or render services in the future, stemming from the receipt of advance payment. (155)

prepaid expenses

assets representing advance payment of the expenses of future accounting periods. As time passes, adjusting entries are made to transfer the related cost from the asset account to the expense account.

unearned revenue/Unearned revenue

for accounting purposes, amounts collected in advance do not represent revenue, because these amounts have not yet been earned. Amounts collected from customers in advance are recorded by debiting the cash account and crediting in ______________ account. ________________ is sometimes referred to as deferred revenue. (155)

prepaid expenses

payments in advance often are made for such items as insurance, rent, and office supplies. If the advance payment will benefit more than just the current accounting period, the cost represents an asset rather than expense. the cost of this asset will be allocated to expense in the accounting periods in which the services or the supplies are used. In summary, ____________ are assets; they become expenses only as the goods or services are used up. (150)

depreciable assets/depreciable assets/depreciable asset/depreciable asset/depreciation expense

physical objects with a limited life. The cost of these assets is gradually recognized as depreciation expense. in other words, their physical objects that retain their size and shape but that eventually wear out or become obsolete. They are not physically consumed, as are assets such as supplies, but nonetheless their economic usefulness diminishes over time. Examples of ___________________ include buildings in all types of equipment, fixtures, furnishings - and even railroad tracks. Land, however, is not viewed as a ________________, as it has unlimited useful life. each period, a portion of a _______________ usefulness expires. Therefore, corresponding portion of its cost is recognized as ______________. (151)

accruing uncollected revenue

revenue may be earned or accrued during the current period, even though the collection of cash will not occur until a future period. Unrecorded earned revenue, for which no cash is been received, requires an adjusting entry at the end of the accounting period. The adjusting entry is recorded by debiting the appropriate asset (for example, accounts receivable or interest receivable) and by crediting the appropriate revenue account (for example, service revenue earned or interest earned). (147)

immaterial

something of little or no consequence. Immaterial items may be accounted for in the most convenient manner, without regard to other theoretical concepts.

matching principle

the accounting principle of offsetting revenue with the expenses incurred in producing that revenue. Requires recognition of expenses in the periods that the goods and services are used in the effort to produce revenue.

realization principle

the accounting principle that governs the timing of revenue recognition. Basically, the principal indicates that revenue should be recognized in the period in which it is earned.

straight-line method

the formula for computing depreciation expense by the _____________ method is as follows. Depreciation expense (per period) = Cost of the Asset divided by Estimated Useful life. (153)

straight-line method of depreciation

the most widely used means of estimated periodic depreciation expense is the ___________________. under this approach, an equal portion of the assets cost is allocated to depreciation expense in every period of the assets estimated useful life. (153)

book value/book value

the net amount at which an asset appears and financial statements. For depreciable assets, _____________ represents cost minus accumulated depreciation. Also called carrying value. this value is of significance primarily for accounting purposes. It represents costs that will be offset against the revenue of future periods. It also gives users of financial statements an indication of the age of a company's depreciable assets.(154)

useful life

the period of time that a depreciable asset is expected to be useful to the business. This is the period over which the cost of the asset is allocated to depreciation expense

depreciation/depreciation expense

the systematic allocation of the cost of an asset to expense during the periods of its useful life. the rationale behind _________________ lies in the matching principle. Our goal is to offset a reasonable portion of the assets cost against revenue and each period of the assets useful life. This expense occurs continuously over the life of the asset, but there are no daily transactions. Therefore, adjusting entries are needed at the end of each accounting period to transfer an appropriate amount of the assets cost to _____________________. (151)

straight-line method of depreciation

the widely used approach of recognizing an equal amount of depreciation expense in each period of a depreciable assets useful life.

materiality

this term refers to the relative importance of an item or an event. An item is considered material if knowledge of the item might reasonably influence the decisions of users of financial statements. Accounts must be sure that all material items are properly reported on financial statements. (162)

accruals and deferrals

timing differences between cash flows and the recognition of revenue and expenses are referred to as _________________. (146)

Accrue

to grow or accumulate over time: for example, interest expense.

adjusting entry

when a business makes an expenditure that will benefit more than one accounting period, the amount usually is debited to an asset account. At the end of each. Benefiting from this expenditure, and adjusting entry is made to transfer an appropriate portion of the cost from the asset account to an expense account. This adjusting entry reflects the fact that part of the asset has been used up - or become an expense - during the current accounting. An _________________ to convert an asset to an expense consists of a debit to an expense account any credit to an asset account (or Contra- asset account). (150)

unearned revenue

when a company collects money in advance from its customers, it has an obligation to render services in the future. Therefore, the balance of an ____________ account is considered to be a liability; it appears in the liability section of the balance sheet, not in the income statement. (155)

unearned revenue/Unearned revenue

when a company collects money in advance from its customers, it has an obligation to render services in the future. Therefore, the balance of an ____________ account is considered to be a liability; it appears in the liability section of the balance sheet, not in the income statement. _______________ differs from other liabilities because it usually will be settled by rendering services, rather than by making payment in cash. In short, it will be worked off rather than paid off. Of course, if the business is unable to render the service, it must discharge this liability by refunding money to its customers. (155)

unearned revenue account/unearned revenue

when a company renders the services for which customers have paid in advance, it is working off its liability to these customers and is earning the revenue. At the end of the accounting period, and adjusting entries made to transfer an appropriate amount from the _______________ to a revenue account. this adjusting entry consists of a debit to a liability account (_________________) and a credit to a revenue account. (155)