Chapter 4 canvas notes

If the interest rate doesn't say monthly or yearly or anything, what is implied?

yearly

depreciation expense =

(asset cost -residual value (or value at end of life or amount not depreciated or salvage value)) / useful life

Preparing the financial statements 3 steps

1. Use Revenue, Gain, Expense, and Losses accounts to prepare the Income Statement Revenue -Costs -Expenses = Income from Operations + Gains -Losses = Net Income 2. Use Net Income and the Dividends account to prepare the Statement of Stockholders' equity --Retained Earnings component 3. Use Assets, Liabilities, Contributed Capital/Capital Stock, and Retained Earnings accounts to prepare the Balance Sheet

A bank loaned $100,000 to a customer on 1/1/X4 The yearly interest rate is 8%. The note is for two years (due 12/31/X5) and interest is due at the end of the two year period. What adjusting entry is required at 12/31/X4? 12/31/X5

100k X 0.08 X (12/12) = 8,000 interest receivable Interest receivable Dr 8,000 Revenue Cr 8,000 Cash Dr 116K Interest receivable Cr 8,000 Revenue Cr 8,000

Denton, Inc. pays its employees every Friday. Year-end, 12/31/X6, falls on a Wednesday. The employees have earned salaries of $45,000 for Monday through Wednesday of the week ended 12/31/X6. What adjusting entry is required at 12/31/X6? What journal entry would be made when the employees are paid on Friday, January 2, 20X7

45,000/3 = 15,000/day 12/31/X6 Wages expense Dr 45,000 Wages payable Cr 45,000 1/2/X7 Wages expense Dr 30,000 Wages payable Dr 45,000 Cash Cr 75,000

contra account

A contra account is a general ledger account which is intended to have its balance be the opposite of the normal balance for that account classification. For instance, a contra asset account is intended to have a credit balance instead of the debit balance normally found in an asset account.

For Buildings and Equipment, the contra-account for the total cost used to date is called

Accumulated Depreciation

Accruals End-of-period adjustment typically requires:

Activities that result in earning revenues or incurring expenses BEFORE cash exchanges hands or source documents (typically an invoice) are received recognition of revenue and the related receivable (asset ) (MUST OCCUR AT END OF MONTH)!!! Example, interest receivable for a bank, rent receivable for a landlord Receivable Dr Revenue Cr LATER (NOT AN ADJUSTING ENTRY) Cash Dr Receivable Cr OR recognition of expense and the related payable (liability) Example: Wages payable for work done last few days of month, interest payable Expense Dr Payable Cr LATER (NOT AN ADJUSTING ENTRY) Payable Cash

Depreciation is an _____ concept --NOT a ________ concept

Allocation Valuation (the goal is to allocate the cost over its life not reflect the actual change in the value of the asset)

All accounts under _____, ______, and ________ are permanent or _____ accounts and are never closed. _______ accounts are not permanent and are closed at the end of the period.

Assets, liabilities, stockholders' equity real Income statement

Adjusting entries

At the end of the accounting period, adjusting journal entries are recorded to update accounts for proper revenue recognition and expense matching.

Deferrals (definition, what accounts does this process create, end of period adjustment required with those accounts, goal)

Cash is received or paid BEFORE the recognition of revenues or expenses So..........the recognition of the revenue or expense is Deferred (delayed) until the Revenue has been Earned or the Expense has been Incurred This process creates Unearned Revenue (a Liability) NOT AN ADJUSTING ENTRY Cash or A/R Dr Unearned Revenue (or deferred revenue) Cr LATER (ADJUSTING ENTRY) Unearned Revenue Dr Revenue Cr OR Prepaid Expense/Supplies/Equipment (an Asset) NOT AN ADJUSTING ENTRY Asset (prepaid expense) Dr Cash Cr LATER (ADJUSTING ENTRY) Expense Dr Asset (Prepaid expense) Cr An End-of-period adjustment typically requires the recognition of some portion of the deferred amount as a revenue or expense Our goal is to adjust the unearned revenue or prepaid expense accounts to reflect the amount of revenue earned or expense incurred

Order of events for accounting cycle (8)

General journal General ledger Trial balance Adjusting entries (general journal) Adjusting entries (general ledger) Adjusted trial balance Financial statements Closing entries

gross profit

Gross profit is the profit a company makes after deducting the costs associated with making and selling its products, or the costs associated with providing its services. Gross profit will appear on a company's income statement, and can be calculated with this formula: Gross profit = Revenue - Cost of Goods Sold.

ALL _______________accounts and the ____________ account (if used) are called temporary accounts since they only contain _____________ ALL _______________ accounts are called permanent accounts because they contain the effects of ____________

Income; Dividends Declared; transactions for the current period balance sheet; all transactions since the inception of the business (the ending balance from one accounting period becomes the beginning balance for the next)

On 9/30/X6 ABC Co. pays Insure Co. $1,200 for a one year insurance policy: Prepaid insurance expense Dr $1,200 Cash Cr 1,200 What adjusting entry is required at 12/31/X6?

Insurance expense Dr 300 Prepaid expense Cr 300

If I am a bank, then an example of recognizing revenue from A/R is...

Interest receivable which will later be credited once cash is debited for the interest (the customer pays their interest)

Trial Balance (Definition) The account balances are prior to The primary purpose of the trial balance is

Listing of all accounts (assets, liabilities, equity (contributed capital and retained earnings), revenues, costs, and expenses with their ending account balances (debit or credit) prior to any end of period adjusting entries to show that debits equal credits

Are dividends ever an expense?

NO

Will cash ever be debited or credited as a result of an adjusting entry?

NO

Will cash ever be increased or decreased as a result of an adjusting entry?

NO

The cost of a long-lived asset less its accumulated depreciation is called

Net Book Value

Earnings per share (EPS) is reported on the income statement. EPS =

Net Income/number of common shares outstanding during the period

operating income

Operating income takes a company's gross income, which is equivalent to revenue minus COGS, and subtracts all operating expenses and depreciation

Interest payment equation

P*R*T where P = principle amount of loan R = interest rate T = time or n/12 where..... n = number of months in accounting cycle This gives you the amount of interest due at the end of an accounting cycle with n months

Depreciation

Recognition of expense related to the use of long-lived assets Calculating depreciation expense using straight-line method (assumes an equal amount of expense every period)

Adjusting entries make the: ______ and ______ HAPPEN!

Revenue Recognition Matching Principles

What would happen without adjusting entries?

Revenues and expenses would be understated

net book, or book value or carrying value

The cost of a long-lived asset less its accumulated depreciation

3 things always true for adjusting entries

They occur at the end of the period There is NO CASH involved There is ALWAYS recognition of a revenue or expense involved

On 11/1/X6 Rental Co. received a check for $3,000 for the first three months' rent on equipment: Cash Dr $3,000 Unearned Revenue Cr 3,000 What adjusting entry is required at 12/31/X6?

Unearned Rev Dr 2,000 Revenue Cr 2,000

3 types of adjusting entries?

adjustment of deferred amounts recording of accruals correction of errors

Accruals Cash receipt ________ Revenue Recognition Cash payment ________ Expense Recognition Deferrals Cash receipt ________ Revenue Recognition Cash payment ________ Expense Recognition

after, after before, before

Adjusting entries are always at the ___ of the accounting period

end

Adjusting entries are always _____ events

internal

Another word for temporary account

nominal

The first party mentioned in a transaction is generally

the party we are recording the journal entry for