FNC 1 Chapter 3
In cash basis
-Cash receipts are treated as revenues - Cash payments are treated as expenses.
Remember the following three facts about adjusting entries.
1. Adjusting entries never involve cash. 2. Adjusting entries either a. Increase revenue earned (Revenue credit) or b. Increase an expense(Expense Debt)
Financial Statement should be prepared in the following order:
1. Income statement-to determine net income or net loss 2. Statement of owner's equity- which needs net income or net loss from the income statement to compute ending capital. 3. Balance sheet- which needs the amount of ending capital to achieve its balancing feature.
Adjustments are needed to properly measure two things:
1. Net income loss on the income statement 2. Assets and liabilities on the balance sheet.
The adjusting process has two purposes.
1. To measure net income or net loss on the income statement. Every adjustment affects a revenue or an expense. 2. To update the balance sheet. Every adjustment affects an asset or a liability.
Summary question pg 164
1.B,2C.3D 4D 5B 6B 7 A 8B 9A 10d
A contra account has two main characteristics
A Control account is paired with and follows its related account. A contra account's normal balance is the opposite of the balance of the related account.
Which basis of accounting better measures business income?
Accrual Basis, because it provides more complete reports of operating performance and financial position.
What are the distinctive features of accrual accounting and cash basis accounting?
Accrual accounting is superior because it provides more information
For example of contra account and accumulated depreciation
Accumulated depreciation is the contra account that follows Furniture. Furniture has a debit balance. so Accumulated depreciation, a contra asset has a credit balance, `
Unearned revenue is always an
Amounts that may be out of balance
Accounting data flow from the
Balance sheet to int income statement, Statement of owner's equity to the balance sheet.
Another example of accrued expense
Interest accrues as time passes on the note
A useful step in the preparing the financial statement
Is to list the accounts along with their adjusted balances, on an adjusted trial balances.
Th process of going out of business is called
Liquidation
How to measure expenses?
Matching principle- Subtract expenses from revenues in order to measure net income.
Example of a prepaid expense
Mcdonalds's, makes prepayments for rent, insurance, and supplies. Pre paid expenses are assets rather than expenses.
The matching principles does two things
Measures all the expenses incurred during the period. Matches the expenses against the revenues of the period.Pg 137
Two basic categories of adjustments
Prepaid and accruals.
Which types of adjusting entries are natural opposites?
Prepaid and accruals.
Assume you prepay Hercules Workout world for a package of six physical training sessions. Which type of account should you have in your records?
Prepaid expense
Adjusting entries fall into five types
Prepaid expenses, Depreciation, Accrued Expenses, Accrued revenues,Unearned revenues,
Unearned revenue
Receiving cash before earning it creates a liability to perform work in the future called unearned revenue
The revenue principle says
Record revenue only after you have earned it
Cash-Basis accounting
Records only cash receipts and cash payments. It ignores receivables payable and depreciation . Only very small business use cash basis accounting.
Accrual Accounting
Records the effect of each transaction as it occurs- that is revenues are recorded when earned and expenses are recorded when incurred.
Accrued expense
Refers to an expense of this type. For example an employee salary grows the the employee works.
Deferred revenue
Same as unearned revenue
Hercules WOrkout World gains a client who prepays 630 for a package of six physical training sessions. Hercules Workout World collects the 630 in advance and will provide the training later. After two training sessions, what should Hercules Workout World report on its income statement?
Service revenue of 210
Adjusting the accounts is the process of
Subtracting expenses from revenues to measure net income
In a prepaid adjustment,
The cash payment occurs before an expense is recorded.
What does the book value represent.
The following costs invested in the asset that the business has not yet used.
Prepaid expenses vs. Plant assets
The major differences is the length of time it's takes for the asset to be used up. Prepaid expenses usually expire within a year, while plant assets remain useful for several years.
Book Value
The resulting net amount (cost minus accumulated depreciation) of a plant asset is called its book value.
Where to start with the measurement of income at the end of the period?
Unadjusted trial balance, usually referred to simply as the trial balance.
The revenue Principle tell accountants
When to record revenue, That is , when to make a journal entry for a revenue. The mount revenue to record.
Accrued Revenue
Which is a revenue that has been earned but not yet collected in cash.
Accrued means
You must journalize whatever amount you are being told about.
Accural accounting requires entries to be adjusted at what time
adjusting entries at the end of the period.
Plant assets
are long lived tangible assets used in the operation of a business. Examples include land, buildings, equipment, and furniture.
Accrual adjustment
as the opposite of prepaid adjustment.
Adjusting entries
assign revenues to the period when they are earned and expenses to the period when they are incurred.
The allocation of a plant asset's cost to expense is called
depreciation
The time period concept
ensures that information is reported often. To measure income companies update their accounts at the end of each period
The matching principle
guides accounting for expenses. Recall that expenses such as salaries, rent, utilities, and advertising-are assets used up and liabilities incurred in order to earn revenue.
Accumulated Depreciation
is a contra asset, which means that it is an asset account with a normal credit balance.
