ch. 4

when and what is recorded on the balance sheet?

* ASSETS are reported at amounts representing the economic benefits that remain at the end of the period * LIABILITIES are reported at amounts owed at the end of the period

when and what is recorded on the income statement?

* REVENUES are recorded when earned * EXPENSES are recorded in the same period as the revenues to which they relate

what do you do when you're closing temporary accounts?

* transfer net income (or loss) and dividends to retained earnings * establish zero balances in all income statement and dividend accounts

order of the adjustment process

1. analyze the accounts to determine the amount of the adjustment 2. record the adjusting entry in the journal 3. summarize the adjusting entries in the accounts

order the statements/entries are prepared in

1. prepare the adjusting entries 2. prepare an adjusted trial balance 3. prepare the financial statements

examples of deferral adjustments

ASSETS/EXPENSES - supplies (balance) ... supplies expense (income) - prepaid rent (balance) ... rent expense (income) - prepaid insurance (balance) ... insurance expense (income) LIABILITIES/REVENUES - deferred revenue (balance) ... sales/service revenue (income)

examples of accrual adjustments

ASSETS/REVENUES - interest receivable (balance) ... interest revenue (income) - rent receivable (balance) ... rent revenue (income) LIABILITIES/EXPENSES - income tax payable (balance) ... income tax expense (income) - wages payable (balance) ... wages expense (income) - interest payable (balance) ... interest expense (income)

what are deferral adjustments used for?

DECREASE balance sheet accounts and INCREASE corresponding income statement accounts

the adjusting entry to record revenue for services the seller has performed but not yet collected requires:

a debit to accounts receivable and credit to service revenue

after posting the adjusting entry to record revenues for which the seller has performed of its obligations but has not yet collected, which account will be increased?

accounts receivable

how does the timing of adjusting entries differ from the accounting for daily transactions?

adjustments are made at the end of the accounting period because making them on a daily basis would be inefficient

closing journal entries are recorded __________

after the financial statements have been prepared

after the adjustments have been recorded, the adjusted balance in the prepaid rent account represents the _________

amount of the prepayment that remains towards future rental periods

contra-account

an account that is an offset to, or reduction of, another account - opposes account it offsets - has a normal balance opposite of the account it offsets - ex: accumulated depreciation (normal credit balance)

deferral adjustments

an expense or revenue has been deferred if we have postponed reporting it on the income statement until a later period * ex: get paid in advance to do work later

why is the deferred revenue account reduced during the adjustment process?

as the seller performs its obligations, it is removed from deferred revenue and transferred into a revenue account

each adjusting entry always includes one ______ sheet and one _________ statement

balance, income

the adjusted trial balance should be prepared ___________ the financial statements are prepared to prove the ____________ of the debits and credits

before; equality

the entry to close service revenue into retained earnings includes a _________

debit to service revenue, credit to retained earnings

why is the balance in the depreciation expense account generally different from the balance in the accumulated depreciation account?

depreciation expense only reflects the current period depreciation. accumulated depreciation contains depreciation since the asset was purchased

adjusting entries are made at the _______ of the accounting period, while daily transactions are made throughout the accounting period

end

gift cards

example of a transaction in which a company receives payment in advance of fulfilling a sale or performing a service - results in an increase to cash, an increase to deferred revenue

TRUE or FALSE? accumulated depreciation is a contra-account to a long-lived asset account, such as equipment. this means that it increases the balance of the long-lived asset on the balance sheet

false

TRUE or FALSE? a contra-account, such as accumulated depreciation, will have a normal debit balance.

false - normal credit balance since the true assets have a debit balance

TRUE or FALSE? since retained earnings is involved in the closing process, it is considered a temporary account

false - retained earnings is a permanent account

an example of an account that could be included in an accrual adjustment for expense is:

interest payable

what transaction constitutes an accrual adjustment involving a revenue account?

interest revenue on a note receivable

adjustments help to ensure that all _______ are recorded in the period in which they are incurred

journal entries

interest incurred, but not yet paid during an accounting period, should be recorded as an expense and a(n) ___________

liability

adjusting journal entries __________ involve cash

never

what does each deferral adjustment involve?

one ASSET and one EXPENSE account, OR one LIABILITY and one REVENUE account

what does each accrual adjustment involve?

one ASSET and one REVENUE, or one LIABILITY and one EXPENSE account

expense recognition principle

requires that a portion of long-lived assets be transferred to an expense account during the accounting period the asset is being used to generate revenues

what's true regarding long-lived assets, like equipment?

the original cost will not change during the adjustment process

depreciation

the process of allocating the cost of buildings, vehicles, and equipment to the accounting periods in which they are used - accumulated depreciation: balance sheet, total amount depreciated - depreciation expense: income statement

closing process

the step in the accounting cycle where entries are recorded to update retained earnings and zero out temporary accounts - temp. accounts are closed into retained earnings - perm. accounts are not closed and are reported on the balance sheet

when should a depreciation expense be recorded?

to recognize the use of and benefit received from long-lived assets, such as equipment, during the accounting period

what are the effects on the accounting equation from the adjustment for depreciation?

total assets will decrease and total stockholders' equity will decrease

after the adjustments have been completed, the adjusted balance in income tax expense account represents _____________

total income tax that has been paid and accrued during the period

what are the effects on the accounting equation from the adjustment for which the seller has satisfied the performance obligation to its buyers during the accounting period that had previously been recorded as a liability?

total liabilities will decrease and total stockholders' equity will increase

temporary accounts

track financial results for a limited period of time - revenues, expenses, dividends

permanent accounts

track financial results from year to year - liabilities, assets, equity

what 2 closing journal entries are needed for closing temporary accounts?

- DEBIT revenue accounts and CREDIT expense accounts (deb. or cred. difference to retained earnings) - CREDIT dividends declared and DEBIT retained earnings

how do the adjusting entry to record the supplies used during the period affect the financial statements?

- supplies on the balance sheet will decrease - net income on the income statement will decrease - supplies expense on the income statement will increase

the deferred revenue t-account will show what?

- the amounts the seller has fulfilled of its obligations that were collected in advance on the debit side - the amounts received in advance that the seller has not yet fulfilled of its obligations on the credit side - the normal ending balance on the credit side

during the closing process, the closing entries to individual expense accounts will be recorded with a _________ to reduce the account balance to zero

credit

adjustments ensure that liabilities are reported as all amounts ________ at the end of the accounting period

owed

what accounts does the post-closing trial balance have balances for?

permanent

TRUE or FALSE? adjustments are not made on a daily basis because it's more efficient to do them all at once at the end of each period

true

TRUE or FALSE? cash is not always received or paid in the period in which the company earns the related revenue or incurs the related expense

true

TRUE or FALSE? financial statements are prepared before adjustments to ensure that debits equal credits before concluding the adjustment process

true

when are accrual adjustments needed?

when a company has earned revenue or incurred an expense in the current period but has not yet recorded it because the related cash will not be received or paid until a later period

what balance will all the income statement accounts and the dividend account have in the closing entries?

zero

TRUE or FALSE? adjustments are made to the accounting records at the end of the period to state assets, liabilities, revenues, and expenses at appropriate measures

true