Chapter 4 Accounting
accruals and deferrals
Adjusting entries fall into two categories:
adjusting entries
needed to ensure that the revenue recognition and matching principles are followed
principlexratextime=
interest rate
time period assumption
economic life of business can be divided into artificial time periods
accrued expenses
expenses incurred but not yet paid in cash or recorded
matching principle
expenses matched with revenues in the period when efforts are expended to generate revenues
accrued expenses
an adjusting entry serves two purposes: 1) It records the obligations, and 2) It recognizes the expenses
adjusting entries
are entries that are not triggered by an outside event (a sale, a purchase of goods etc.) but are activities monitored internally by a company
book value
cost minus accumulated depreciation
revenue and expense recognition
in accordance with generally accepted accounting principles (GAAP)
cost-salvage value
depreciable cost=
adjusting entries for "prepaid expenses"
payment of cash, that is recorded as an asset because service or benefit will be received in the future. cash payment before expense recorded
Deferrals
prepaid expenses, unearned revenues
insurance, supplies, advertising, rent, maintenance on equipment, fixed assets (depreciation)
prepayments often occur in regard to:
adjusting entries for "unearned revenues"
receipt of cash that is recorded as a liability because the revenue has not been earned. cash receipt before revenue recorded
revenue recognition principle
revenue recognized in the accounting period in which it is earned
accrued revenues
revenues earned but not yet received in cash or recorded
adjusting entries
A company must make _____ _______ every time it prepares financial statements.
rent, interest, taxes, salaries
Accrued expenses often occur in regard to:
rent, interest, services performed
Accrued revenues often occur in regard to:
balance sheet; income statement
Adjusting entries ensure that the correct amounts are on the ______ ______ and on the _____ _____.
Temporary
All revenue accounts, all expense accounts, dividends
Accrued Revenues
An adjusting entry serves two purposes: 1) it shows the receivable that exists, and 2) it records the revenues earned.
depreciation
Buildings, equipment, and vehicles (long-lived assets) are recorded as assets, rather than an expense, in the year acquired. Companies report a portion of the cost of a long-lived asset as an expense (depreciation) during each period of the asset's useful life (matching principle).
accurate
If adjusting statements are not done, the financial statements will not be _____.
income statement account; balance sheet account
Every adjusting entry will include one ____ _____ _____ and one ____ ______ _____.
Adjusting Entries for "accrued expenses"
Expenses incurred but not yet paid in cash or recorded. Expense recorded before Cash Payment
adjusting entries for "accrued revenues"
Revenues earned but not yet received in cash or recorded. Revenue recorded before cash receipt
closing the books
Temporary account balances are transferred to the permanent stockholders' equity account-Retained earnings
1. analyze business transactions 2. journalize the transactions 3. post to ledger accounts 4. prepare a trial balance 5. journalize and post adjusting entries 6. prepare an adjusted trial balance 7. prepare financial statements 8. journalize and post closing entries 9. prepare a post-closing trial balance
The accounting cycle
Closing entries
These serve two primary purposes: 1) Update the retained earnings account. 2) Close the temporary (I/S and dividend accounts)
revenues, expenses, dividends
Three types of accounts need to be closed:
rent, airline tickets, school tuition, magazine subscriptions, customer deposits
Unearned revenues often occur in regard to:
Accruing Interest Expense
When money is borrowed, interest is charged for the use of that money.
prepaid rent
When the cash is paid, the company has purchased an asset called:
supplies
When the cash is paid, the company has purchased an asset called:
accruing salary expense
a common expense that needs to be accrued before financial statements are prepared
accumulated depreciation
a contra asset account; appears just after the account it offsets (equipment) on the balance sheet
accumulated depreciation
a contra-account, a contra-asset
accumulated depreciation
a total depreciation expense taken to date
accruals
accrued revenues, accrued expenses
adjusted trial balance
after all adjusting entries are journalized and posted the company prepares another trial balance from the ledger accounts. Its purpose is to prove the equality of debit balances and credit balances in the ledger
Permanent
all asset accounts, all liability accounts, stockholders' equity accounts
depreciation expense
the portion of the cost allocated to any one accounting period
depreciable cost
the ultimate net cost of our asset, hence the amount we want to take as an expense
why adjusting entries are necessary
transactions can't always be recorded daily because it is inefficient (salaries, use of supplies, etc.); some transactions only occur with the passage of time and can only be recorded once that time has passed (interest and depreciation expense, use of pre-pd rent); some items are estimated and recorded at the end of the month before an invoice is received (utility or repair bill)
deferrals
types of adjusting entries
depreciation
when a company buys an asset that is used in the business (e.g. buildings, equipment, furniture, vehicles, computers, etc.) and it will be used for more than one year, GAAP says that the cost must be expensed over the accounting periods the asset will be used.