Chapter 3 Accounting cycle end of period

Adjusting Entries

(internal Transactions) record events that have occurred but not yet been recorded, bringing them up to date for the financial statements

Closing Entry Purposes

1) transfer temporary accounts into retained earnings 2) reduce balances in temporary accounts to zero to prepare for measuring in the next period

accruals AE

ACCRUED EXPENSES-record expense in current period that will be paid in cash in the future and ACCRUED REVENUES- record revenue in the current period that will be collected in cash in a future period.

prepayments/deferrals AE

PREPAID EXPENSES- pay cash or have obligation for cash that purchases an asset that will benefit overtime and DEFERRED REVENUE- receive cash in current period that will be recorded as a revenue in the future period (haven't done all services yet).

Main difference between cash and accrual?

TIMING

When will supplies be expensed?

The amount of supplies used in the given month helped generate revenue for that period therefore supplies are expensed as they are used.

prepaid expenses AE

a debit to an expense and a credit to an asset account. +E, -SE and -A (ex:// supplies expense, prepaid rent, depreciation expense)

permanent accounts

all the accounts in the BS including retained earnings (assets, liabilities, SE)

accrued interest equation

amount of note payable X annual interest rate X fraction of the year= Interest

contra account

an account with a balance that is opposite or contra to that of its related accounts. ( accumulated depreciation is an asset contra account)

When will prepaid rent be expensed?

at the end of each month you will record the cost of rent for that month only because it helped generate revenue for that time frame.

No adjustment accounts

common stocks and dividends or providing service for cash and paying salaries because they are recorded at the same time as the cash flow.

accounts recievable AE

debit accounts receivable and credit service revenue

accrued revenues AE

debit asset and credit revenue account

accumulated depreciation AE

debit depreciation expense and credit accumulated depreciation

accrued interest AE

debit interest expense and credit interest payable (notes payable and interest payable are separate accounts)

interest receivable AE

debit interest receivable and credit interest revenue

deferred revenue AE

debit liability (deferred revenue) and credit revenue account (service revenue)

Accrued Expenses AE

debit to expense account (salaries expense) and credit to liability (salaries payable)

When will salaries be expensed?

employees produce revenue in the period they work. Record the expense as they work.

interest payable

is a current liability

Post-closing trial balances

is a list of all the account balances at a particular date after we have updated account balances for closing entries for the general ledger

Intangible assets

lack physical substance but have long term value. (patents, trademarks, copyrights, franchises)

book/carrying value

original cost - accumulated depreciation

deferred revenues JE

receiving cash before service is provided. we debit cash and credit a liability.

Accrual-basis accounting

record revenue when goods or services are provided and expenses with the corresponding revenues not necessarily when we receive cash or pay cash. (accepted by GAAP)

Matching Principle

report the expense in the same period as the revenue they help generate

Temporary accounts

revenues, expenses, and dividends are all going to be transferred into retained earnings at closing

adjusted-trial balance

takes all of the revenue, expenses, and dividend accounts.

When will advertising expenses be recorded?

the expense is recorded in the period the advertisement is provided. (period cost)

Cash-basis accounting

we record revenues at the time we receive cash and expenses at the time we pay cash. AKA cashflow and the time revenues and expenses are recording are the same. (Not accepted by GAAP.)

Expense Recognition

when do we record the cost associated with producing revenue? (advertising expenses, salaries, utilities, office rent, and business supplies)