ACCT 201 CH3

In what two cases are adjusting entries unnecessary?

1) for transactions that do not involve revenue or expense activities 2) for transactions that involve revenues or expenses being recorded at the same time as the cash flow

when recording an adjustment for the use of equipment during the current accounting period, which two accounts are effected?

accumulated depreciation, depreciation expense

deferred revenue

amounts collected in advance of being earned are recorded as deferred revenues. (unearned revenue)

contra account

an account with a balance that is opposite (contra) to that of its related accounts

what does the balance sheet include?

assets, liabilities, stockholder's equity

prepaid expenses

cost of assets acquired in one period that will be expensed in a future period

when a bank receives $ from interest

debit interest receivable, credit interest revenue

book value

equals original cost of an item minus the accumulated depreciation

matching principle

expenses are typically reported in the same period as the revenues they help generate (think cause and effect)

accrued interest formula

interest = amount of notes payable x annual interest rate x fraction of the year

accrual-basis accounting

recording revenues when they are earned (revenue recognition) and we record expenses with related revenues (expense recognition)

what is the difference between accrual-basis net income and cash-basis net income?

the difference between the two methods is the timing of when we record revenues and expenses

depreciation

the process of allocating the cost of an asset, such as equipment to expense over the assets' useful life

revenue recognition principle

we record revenue at the time it is earned, not necessarily when cash is received.

Adjusting entry for a prepaid expense includes a debit and a credit to what?

a debit to an expense account (increase an expense), a credit to an asset account (decrease an asset)

accrued expense

when a company has a cost but hasn't yet paid cash or recorded an obligation to pay for that cost, it should still record the cost as an expense and also a liability for the amount owed.

accrued revenue

when a company has earned revenue but hasn't yet received cash or recorded an amount receivable, it should still record the revenue and an asset for the amount expected to be received.

unearned revenues

when a company receives cash for a service it hasn't provided yet. debit cash; credit liability

adjusting entries

when we record events that have occurred but that we have not recorded yet necessary for accrual-basis accounting

cash-based accounting

revenues and expenses are recorded at the time we receive or pay cash.

What does the income statement include?

revenues and expenses that effect net income over a period of time