Ch 3

4 types of adjusting entries

1. prepaid expenses 2. unearned revenue 3. accrued revenue/expenses

salaries payable

account used to record salaries owed to employees for work they did during the current period

interest expense

accumulates or accrues throughout the accounting period on notes payable when interest expense is accrued and adjusted at the end of the year, total liabilities increase and total stock holders equity decreases;

revenue recognition

adjustments to revenue accounts at the end of a pay period

longterm assets bare depreciation

allocation of the costs over their useful lives example: debit equipment, credit cash adj entry: debit depreciated expense, credit accumulated depreciation

deferred revenue, unearned revenue, a liability

amounts collected in advance of being earned

accrual adjustments

company has earned revenue or incurred an expense but no money has been exchanged yet can increase liabilities and increase expenses

expense account

cost incurred on borrowing money

accrued expense

happens before cash is paid example: utilities, they are used but not paid until the end of the month example: JE: debit salaries expense, credit cash ADJ entry: debit salaries expense, credit salaries payable JE: debit salaries payable and salaries expense, credit cash

prepaid expenses

paying in advance to create asset that lasts several months when adjusting, it reduces asset and records expense for amount used up examples: prepaid rent, prepaid insurance, longterm assets(supplies, equipment) when adjusting, expenses are always debited example: debit prepaid insurance, credit cash adj entry: debit insurance expense, credit prepaid insurance

unearned revenue

receiving cash in advance creating a liability example: debit cash, credit unearned revenue adj entry: debit unearned revenue, credit service revenue

accrual basis accounting

reporting revenues when they are earned and expenses when they are incurred increases liablities and expenses

matching principle

requires an adjustment for wages expense inccured during the accounting period that will be paid in a future accounting period

interest

the cost of borrowing

effects of revenue being earned but not yet collected

total assets increase, and total stock holders equity increases