Midterm

Describe merchandising operations and the two types of merchandise inventory systems

A merchandiser is a business that sells merchandise, or goods, to customers. Two main types of inventory accounting systems are used by merchandisers: (1) A perpetual inventory system, which keeps a running record of merchandise inventory, and (2) a periodic inventory system, which requires businesses to obtain a physical count of inventory to determine quantities on hand.

Explain the internal controls associated with and journalize petty cash transactions

A petty cash fund allows a business to keep cash on hand to pay for small miscellaneous items such as postage, office supplies, and taxi fares. However, petty cash is more liquid than cash in the bank because none of the bank controls are in place. Internal controls associated with petty cash include (1) designation of a custodian, (2) setting a specific amount of cash to be kept in petty cash, and (3) supporting all petty cash fund payments with petty cash tickets. When the petty cash fund is established, the company records a debit to Petty Cash and a credit to Cash. The petty cash fund is replenished by debiting the associated asset and expense accounts and crediting Cash. Discrepancies in petty cash funds are either debited or credited to the Cash Short & Over account.

Apply internal controls to cash receipts

A point-of-sale terminal provides control over cash receipts over the counter. Companies control cash by mail by ensuring appropriate separation of duties when handling cash and recording the transaction.

Prepare the post-closing trial balance

A post-closing trial balance is prepared after the closing entries are recorded and posted to the ledger. It contains only assets, liabilities, Common Stock, and Retained Earnings accounts (permanent accounts). Note that these accounts are the balance sheet accounts.

Define and explain common types of receivables and journalize sales on credit

A receivable is a monetary claim against a business or an individual. There are three major types of receivables: accounts receivable, which represent the right to receive cash in the future from customers for goods sold or for services performed; notes receivable, which represent a written promise that the customer will pay a fixed amount of principal plus interest by a certain date in the future; and other receivables, which represent a miscellaneous category that includes any other type of receivables where there is a right to receive cash in the future. A critical component of internal control over receivables is the separation of cash-handling and cash-accounting duties. A separate accounts receivable account (called a subsidiary account) must be maintained for each customer in order to account for payments received from the customer and amounts still owed. The sum of all balances in the subsidiary accounts receivable will equal a control account balance, Accounts Receivable. Companies can decrease collection time and credit risk by accepting credit cards and debit cards or by factoring or pledging their receivables.

Explain the purpose of a worksheet and use it to prepare adjusting entries and the adjusted trial balance

A worksheet is an internal document that helps identify the accounts that need adjustments. In addition, a worksheet helps summarize data for the preparation of the financial statements.

Explain accounts as they relate to the accounting equation and describe common accounts

An account is a detailed record of all increases and decreases that have occurred in an individual asset, liability, or equity during a specific period. Common asset accounts include Cash, Accounts Receivable, Notes Receivable, Prepaid Expense, Land, Building, and Furniture. Common liability accounts include Accounts Payable, Notes Payable, Accrued Liability, and Unearned Revenue. Common equity accounts include Common Stock, Dividends, Revenues, and Expenses. A chart of accounts lists a company's accounts along with account numbers. A ledger shows the increases and decreases in each account along with their balances.

Explain the purpose of and prepare an adjusted trial balance

An adjusted trial balance is a list of all the accounts with their adjusted balances. It ensures that total debits equal total credits. Be careful when calculating adjusted trial balance totals. Not every adjustment is an addition or a subtraction; it depends on the account balance. For example, debits are added to debits but subtracted from credits.

Adjust and close the accounts of a merchandising business

An adjusting entry must be made for inventory shrinkage—loss of inventory that occurs because of theft, damage, and errors. Two additional adjusting entries must be made to account for the estimated returns. The closing entries are similar to those discussed earlier, except for including the new accounts (Sales Revenue, Sales Discounts Forfeited, Delivery Expense, and Cost of Goods Sold).

Measure the effects of merchandise inventory errors on the financial statements

An error in ending merchandise inventory creates errors in other related accounts. One period's ending merchandise inventory becomes the next period's beginning merchandise inventory.

Demonstrate the use of a bank account as a control device and prepare a bank reconciliation and related journal entries

Bank accounts provide established practices that safeguard a business's money. These controls include use of signature cards, deposit tickets, checks, bank statements, and electronic funds transfers. A bank reconciliation can also be used as a form of internal control. The bank reconciliation compares and explains the difference between cash on the company's books and cash according to the bank's records on a specific date. After the bank reconciliation has been prepared, journal entries must be completed for all items on the book side of the bank reconciliation.

Account for multiple performance obligations using a perpetual inventory system (Appendix 5A)

Companies are required to identify the performance obligations associated with each contract. When contracts involve multiple performance obligations, the company is required to allocate the transaction price to each performance obligation separately. A company should recognize revenue only when, or as, it satisfies each performance obligation. A contract is recorded as Unearned Revenue when the company has not satisfied the obligation of servicing or fulfilling the service contract and the customer has paid in advance.

Explain the internal controls associated with and journalize debit and credit card sales

Debit and credit card sales eliminates two risks—the risk of cash handling by employees and the risk of collecting cash from customers associated with sales on account. Debit and credit card sales are journalized similar to cash sales and typically include a fee (Credit Card Expense) that is paid by the business to the credit card processor. Sales can be either recorded using the net or gross method. The net method records the amount of the sale less the processing fee at the time of sale. The gross method records the gross amount of the sale at the time of sale and the credit card fees are recorded at a later time. Companies that choose to accept debit and credit cards must establish internal controls to protect customer data, including the use of POS terminals and storage of cardholder data on a secure and encrypted network.

Understand the alternative treatments of recording deferred expenses and deferred revenues (Appendix 3A)

Deferred Expenses: In the chapter discussion, Deferred Expenses first records the cash disbursement in the balance sheet account for prepaid expense (asset), and then at the end of the accounting period, the related adjusting entry moves the dollar amount of the asset used from the balance sheet accounts to the income statement accounts. In the appendix, the original transaction for the cash disbursement is recorded in the income statement account for the expense and then the related alternative adjusting entry moves the dollar amount of the deferred expense that has not been used from the income statement expense account to the balance sheet asset account. Deferred Revenues: In the chapter discussion, Deferred Revenues first records the cash receipt in the balance sheet Unearned Revenue (liability) account. Then, at the end of the accounting period, the related adjusting entry moves the dollar amount of the fulfilled liability from the balance sheet account to the income statement account for revenue earned during the period. In the appendix, the original transaction for the cash receipt is recorded in the income statement account for the revenue, and then the related alternative adjusting entry moves the dollar amount of deferred revenue that has not been earned from the income statement revenue account to the balance sheet liability account.

Define debits, credits, and normal account balances using double-entry accounting and T-accounts

Double-entry accounting requires transactions to be recorded into at least two accounts. The T-account is shaped like a capital T, with debits posted to the left side of the vertical line and credits posted to the right side of the vertical line. T-accounts represent ledger accounts. In accounting, debit means left side of the account, and credit means right side of the account. Assets, Expenses, and Dividends are increased with a debit and decreased with a credit. Liabilities, Common Stock, and Revenues are increased with a credit and decreased with a debit. The normal balance of an account is the increase side of that account.

Prepare the financial statements including the classified balance sheet

Financial statements are prepared from the adjusted trial balance in the following order: 1. Income statement: Reports revenues and expenses and calculates net income or net loss during the period—with net income or loss reflected in statement of retained earnings 2. Statement of retained earnings: Shows how retained earnings changed during the period due to net income or net loss and dividends—with the ending retained earnings balance reflected in the stockholders' equity section of the balance sheet 3. Balance sheet: Reports assets, liabilities, and stockholders' equity as of the last day of the period A classified balance sheet classifies each asset and each liability into current and long-term categories. There is no such classification for stockholders' equity. Stockholders' equity categories are illustrated in a later chapter (Chapter 13--Stockholders' Equity).

Differentiate between cash basis accounting and accrual basis accounting

For cash basis accounting, revenue is recorded only when cash is received, and expenses are recorded only when cash is paid. This method is not permitted by Generally Accepted Accounting Principles (GAAP), although it is often used by small businesses. For accrual basis accounting, revenue is recorded when earned, and expenses are recorded when incurred, which may occur before or after cash is received or paid.

Identify accounting principles and controls related to merchandise inventory

Four accounting principles are introduced: o Consistency principle: Businesses should use the same accounting methods and procedures from period to period. o Disclosure principle: A company's financial statements should report enough information for outsiders to make knowledgeable decisions about the company. o Materiality concept: A company must perform strictly proper accounting only for significant items. o Conservatism: A company should exercise caution in reporting items in the financial statements. Controls over merchandise inventory ensure that inventory purchases and sales are properly authorized and accounted for by the accounting system.

Account for merchandise inventory costs under a perpetual inventory system

Four costing methods can be used to determine merchandise inventory costs: o Specific identification method: The specific cost of each unit of inventory determines ending inventory and cost of goods sold. o First-in, first-out (FIFO) method: The first costs into inventory are the first costs out to cost of goods sold; ending inventory is based on the costs of the most recent purchases. o Last-in, first-out (LIFO) method: The last costs into inventory are the first costs out to cost of goods sold; ending inventory is based on the costs of the oldest inventory. o Weighted-average method: This method is based on the weighted-average cost per unit of inventory after each purchase. Weighted-average cost per unit is determined by dividing the cost of goods available for sale by the number of units available for sale.

Prepare Financial Statements

Four financial statements are prepared for each accounting period. The income statement reports net income or net loss, calculated as revenues earned minus expenses incurred, for a specific period of time. The statement of retained earnings reports the change in retained earnings from net income (or net loss) minus dividends for a specific period of time. The balance sheet reports the financial position (assets, liabilities, and equity) of the company at a specific point in time. The statement of cash flows reports the cash receipts and cash payments categorized by operating, investing, and financing activities. The financial statements are prepared in the following order: (1) income statement, (2) statement of retained earnings, (3) balance sheet, and (4) statement of cash flows.

Describe the organization's and rules that govern accounting?

Generally Accepted Accounting Principles Financial Accounting Standards Board (creation) Securities and Exchange Commission

Apply internal controls to cash payments

Good separation of duties between operations of the business and writing checks for cash payments should exist. Many companies use technology to make secure payments.

Identify the impact of adjusting entries on the financial statements

If adjusting entries are not recorded, the balance sheet and income statement accounts will either be overstated or understated. Overstating or understating accounts causes the financial statements to be incorrect.

Define internal control and describe the components of internal control and control procedures

Internal control is the organizational plan and all the related measures designed to safeguard assets, encourage employees to follow company policies, promote operational efficiency, and ensure accurate and reliable accounting records. The Sarbanes-Oxley Act was passed by Congress to revamp corporate governance in the United States. Internal control includes five components: control procedures, risk assessment, information system, monitoring of controls, and environment.

Use inventory turnover and days' sales in inventory to evaluate business performance

Inventory turnover measures how rapidly merchandise inventory is sold and is calculated as: Cost of goods sold / Average merchandise inventory where Average merchandise inventory = (Beginning inventory + Ending inventory) / 2 Days' sales in inventory measures the average number of days merchandise inventory is held by the company and is calculated as: 365 days / Inventory turnover

Apply the lower-of-cost-or-market rule to merchandise inventory

Lower-of-cost-or-market (LCM) requires that merchandise be reported in the financial statements at whichever is lower: the historical cost of the inventory or the market value of the inventory. An adjusting entry must be recorded to write down merchandise inventory if the market value is lower than the historical cost. Market value is defined for LCM as the current replacement cost of the inventory, not the retail value.

Explain the purpose of, journalize, and post reversing entries (Appendix 4A)

Reversing entries are special journal entries that ease the burden of accounting for transactions in a later period. Reversing entries are exactly the opposite of certain adjusting entries and are used only for accrual adjusting entries.

Account for the sale of merchandise inventory using a perpetual inventory system

Sales revenue is the amount that a merchandiser receives from selling its inventory. Sales discounts, offered by the seller as an incentive for the purchaser to pay early, reduce the amount of cash received from a customer for early payment. Sales are recorded at the net amount of the sales less any sales discounts. Sales returns must now be estimated and recorded with two adjusting entries. The first adjusting entry involves a debit to Sales Revenue and a credit to Refunds Payable. The second adjusting entry involves a debit to Estimated Returns Inventory and a credit to Cost of Goods Sold. When a customer actually returns inventory, the company needs to record the refund with a debit to Refunds Payable and credit cash to the customer (or Accounts Receivable) and record the return of the merchandise with a debit to Merchandise Inventory and a credit to Estimated Returns Inventory. Sales allowances are recorded when a customer requests a refund but does not return the inventory. A credit memo is issued which involves a debit to Refunds Payable and a credit to Accounts Receivable (or Cash). Freight out is an operating expense and is debited to the seller's Delivery Expense account

Record transactions in a journal and post journal entries to the ledger

Source documents provide the evidence and data for transactions. Transactions are recorded in a journal, and then the journal entries are posted (transferred) to the ledger. Transactions are journalized and posted using five steps: Step 1. Identify the accounts and the account type (asset, liability, and equity). Step 2. Decide whether each account increases or decreases, then apply the rules of debits and credits. Step 3. Record the transaction in the journal. Step 4. Post the journal entry to the ledger. Step 5. Determine whether the accounting equation is in balance.

Account for merchandise inventory costs under a periodic inventory system (Appendix 6A)

Specific identification, FIFO, LIFO, and weighted-average can be used in a periodic inventory system. Specific identification and FIFO will produce the same amounts for ending merchandise inventory and cost of goods sold under both the perpetual and periodic inventory systems. LIFO and weighted-average generally result in different amounts for ending merchandise inventory and cost of goods sold under the perpetual and periodic inventory systems.

Use the accounting equation to analyze transactions

Step 1. Identify the accounts and the account type (Asset, Liability, or Equity). Step 2. Decide whether each account increases or decreases. Step 3. Determine whether the accounting equation is in balance.

Compare the effects on the financial statements when using the different inventory costing methods

The FIFO method results in the lowest cost of goods sold and the highest gross profit when costs are rising. The LIFO method results in the highest cost of goods sold and the lowest gross profit when costs are rising. The weighted-average method generates amounts for cost of goods sold and gross profit that fall between FIFO and LIFO if costs are consistently increasing or decreasing.

Account for the purchase and sale of merchandise inventory using a periodic inventory system (Appendix 5B)

The Merchandise Inventory account is not used when recording purchase transactions. Instead, Purchases, Purchase Discounts, Purchase Returns and Allowances, and Freight In are used. Sales transactions only involve recording the Sales Revenue. The Merchandise Inventory account is not used. An adjustment for inventory shrinkage is not needed. Closing entries are similar to those in the perpetual inventory system, with the addition of closing the new accounts discussed. Ending Merchandise Inventory must be recorded, and beginning Merchandise Inventory must be removed.

Describe the accounting cycle

The accounting cycle is the process by which companies produce their financial statements for a specific period. These are the steps: 1. Start with the beginning account balances. 2. Analyze and journalize transactions as they occur. 3. Post journal entries to the accounts. 4. Compute the unadjusted balance in each account, and prepare the unadjusted trial balance. 5. Enter the unadjusted trial balance on the worksheet and complete the worksheet (optional). 6. Journalize and post adjusting entries. 7. Prepare the adjusted the trial balance. 8. Prepare the financial statements. 9. Journalize and post the closing entries. 10. Prepare the post-closing trial balance.

Use the acid-test ratio, accounts receivable turnover ratio, and days' sales in receivables to evaluate business performance

The acid-test ratio reveals whether an entity could pay all its current liabilities if they were due immediately. Acid-test ratio = (Cash including cash equivalents + Short-term investments + Net current receivables) / Total current liabilities The accounts receivable turnover ratio measures the number of times the company collects the average accounts receivable balance in a year. Accounts receivable turnover ratio = Net credit sales / Average net accounts receivable The days' sales in receivables indicates how many days it takes to collect the average level of accounts receivable. Days' sales in receivables = 365 days / Accounts receivable turnover ratio

Use the cash ratio to evaluate business performance

The cash ratio measures a company's ability to pay its current liabilities from cash: Cash ratio = (Cash + Cash equivalents) / Total current liabilities

Explain the purpose of, journalize, and post closing entries

The closing process consists of zeroing out all temporary (or nominal) accounts (revenues, expenses, Income Summary, and Dividends) in order to get the accounts ready for the next period. The closing process also updates the Retained Earnings account balance for net income or net loss during the period and any dividends paid to the stockholders. There are four steps in the closing process: 1. Make the revenue accounts equal zero via the Income Summary account. 2. Make the expense accounts equal zero via the Income Summary account. 3. Make the Income Summary account equal zero via the Retained Earnings account. 4. Make the Dividends account equal zero via the Retained Earnings account.

Use the worksheet to prepare financial statements

The columns of a worksheet can be extended to help in preparing the financial statements. The income statement section will include only revenue and expense accounts. The balance sheet section will include asset and liability accounts and all equity accounts except revenues and expenses.

Use the current ratio to evaluate business performance

The current ratio measures a company's ability to pay its current liabilities with its current assets: Current ratio = Total current assets / Total current liabilities.

Use the debt ratio to evaluate business performance

The debt ratio, calculated as Total liabilities / Total assets, is used to evaluate a business's ability to pay its debts.

Use the gross profit percentage to evaluate business performance

The gross profit percentage measures the profitability of each sales dollar above the cost of goods sold. Gross profit percentage is calculated as gross profit divided by net sales revenue.

Use financial statements and return on assets (ROA) to evaluate business performance

The income statement evaluates profitability. The statement of retained earnings shows the amount of earnings kept and reinvested in the company. The balance sheet lists the economic resources owned, the debts and obligations owed, and the residual interest that remains for the stockholders. The statement of cash flows shows the change in cash resulting from operating, investing, and financing activities. Return on assets measures how profitably the company uses its assets. ROA=Net Income/ Average Total Assets

Account for the purchase of merchandise inventory using a perpetual inventory system

The operating cycle of a merchandising business begins with purchase of inventory from a seller. Purchases are documented by an invoice from the seller, requesting payment for the purchases. Purchase discounts, purchase returns, and purchase allowances decrease the amount of net purchases, while freight in increases the amount of net purchases. Sellers offer purchase discounts to purchasers as an incentive for early payment. Purchase returns arise when businesses allow purchasers to return merchandise that is defective, damaged, or otherwise unsuitable, while a purchase allowance is granted to the purchaser as an incentive to keep goods that are not "as ordered." To determine when title to the purchased goods transfers to the purchaser, the purchase agreement specifies FOB (free on board) terms either as FOB shipping point, in which case the buyer takes ownership of the goods at the shipping point, and the buyer pays the freight, or as FOB destination point, in which case the buyer takes ownership at the delivery destination point, and the seller pays the freight. The net cost of inventory purchased is calculated as: Purchases of inventory - Purchase returns and allowances - Purchase discounts + Freight in

Define and apply the time period concept, revenue recognition, and matching principles The time period concept assumes that a business's activities can be sliced into small time segments and that the financial statements can be prepared for specific periods, such as a month, quarter, or year.

The revenue recognition principle tells accountants when to record revenue and requires companies to follow a five-step process: Step 1.​Identify the contract with the customer. A contract is an agreement between two or more parties that creates enforceable rights and obligations. Step 2.​Identify the performance obligations in the contract. A performance obligation is a contractual promise with a customer to transfer a distinct good or service. A contract might have multiple performance obligations. Step 3.​Determine the transaction price. The transaction price is the amount that the entity expects to be entitled to as a result of transferring goods or services to the customer. Step 4.​Allocate the transaction price to the performance obligations in the contract. If the transaction has multiple performance obligations, the transaction price needs to be allocated among the different performance obligations. Step 5.​Recognize revenue when (or as) the entity satisfies each performance obligation. The business recognizes revenue when (or as) it satisfies each performance obligation by transferring a good or service to a customer. A good or service is considered transferred when the customer obtains control of the good or service. The amount of revenue recognized is the amount allocated to the satisfied performance obligation. The matching principle guides accounting for expenses and ensures that all expenses are recorded when they are incurred during the period. It then matches those expenses against the revenues of the period.

Prepare the trial balance and use the trial balance to prepare financial statements

The trial balance summarizes the ledger by listing all the accounts with their balances. Assets are listed first, followed by liabilities, and then equity. The trial balance ensures that debits equal credits and is used to prepare the financial statements.

Prepare a merchandiser's financial statements

There are two formats for the income statement: (1) a single-step income statement that groups all revenues together and all expenses together, without calculating other subtotals, or (2) a multi-step income statement that lists several important subtotals, including gross profit, operating income, and income before income tax expense. A merchandiser's statement of retained earnings looks exactly like that of a service business. The balance sheet will also look the same, except merchandisers list additional current assets, Merchandise Inventory and Estimated Returns Inventory, and an additional current liability, Refunds Payable.

Apply the allowance method for uncollectibles and estimate bad debts expense based on the percent-of-sales, percent-of-receivables, and aging-of-receivables methods

When using the allowance method, companies estimate bad debts expense at the end of the period and record an adjusting entry that debits Bad Debts Expense and credits Allowance for Bad Debts. There are three ways to estimate bad debts expense: • Percent-of-sales method: Computes bad debts expense as a percentage of net credit sales. • Percent-of-receivables method: Determines the balance of the Allowance for Bad Debts account based on a percentage of accounts receivable. • Aging-of-receivables method: Determines the balance of the Allowance for Bad Debts account based on the age of individual accounts receivable. Writing off uncollectible accounts involves a debit to Allowance for Bad Debts and a credit to Accounts Receivable. Recovery of accounts previously written off is recorded by reversing the write-off entry and then recording an entry to receive the cash. The allowance method follows the matching principle and is required by GAAP. Account for notes receivable including computing interest and recording honored and dishonored notes Notes receivable involve interest that is expressed annually and must be adjusted to the appropriate time period (Principal × Rate × Time). Time may be expressed as a fraction of a year in months (number of months/12) or a fraction of a year in days (number of days/365). When the period is given in days, the maturity date is determined by counting the actual days from the date of issue. When counting the number of days in a note term, remember to count the maturity date but omit the date the note was issued. Interest on notes must be accrued at the end of the each period, and an adjusting entry must be recorded by debiting Interest Receivable and crediting Interest Revenue. The receipt of cash at a note's maturity includes the principal plus interest. When a customer dishonors a note, the business can transfer the note receivable (plus interest earned) to an accounts receivable.

Apply the direct write-off method for uncollectibles

Writing off uncollectible accounts when using the direct write-off method involves a debit to Bad Debts Expense and a credit to Accounts Receivable. Recovery of accounts previously written off is recorded by reversing the write-off entry and then recording an entry to receive the cash. The direct write-off method violates the matching principle and is not the method required by GAAP.

Why is accounting important and list the users of accounting information?

accounting is the language of business USERS individuals businesses investors creditors taxing authorities LICENSED Certified Public Accountant Certified Global Managment Accountant Certified Managament Accountant Certified Financial Planner

Describe the accounting equation

assets=liability+equity

Assets

economic resources with future benefits

Liabilities

obligations owed to others

(owners) Equity

residual values of the assets left over after obligations represented by the liabilities are fulfilled

Explain the purpose of and journalize and post adjusting entries Adjusting entries are completed at the end of the accounting period and record revenues to the period in which they are earned and expenses to the period in which they are incurred. Adjusting entries also update the asset and liability accounts. Four types of adjusting entries:

• Deferred expenses: In the related sequence of events, cash has previously been paid to acquire an asset, such as prepaid rent, office supplies, or a plant asset. The accounting entry to record that transaction increases the asset with a debit and decreases cash with a credit. Later, at the end of the accounting period, the adjusting entry recognizes that the asset has been all or partially used up during the current accounting period by increasing the related expense with a debit and decreasing the asset with a credit. Depreciation is a special case of a deferred expense. Because plant asset values are considered more significant and, therefore, more important, the integrity of the original asset acquisition value is maintained in the primary plant asset account, and the reduction of the asset value in the adjusting entry is entered into the related contra asset for accumulated depreciation. • Deferred revenues: In the related sequence of events, cash has previously been received for goods or services to be provided to the customer at some time in the future. The accounting entry to record that transaction increases cash with a debit and increases the liability account Unearned Revenue with a credit. Later, at the end of the accounting period, the adjusting entry recognizes that some or all of the revenues have been earned for goods or services that have since been provided to the customer by decreasing the liability Unearned Revenue with a debit and increasing the corresponding revenue with a credit. • Accrued expenses: In the related sequence of events, the adjusting entry first records that an expense (such as Salaries Expense or Interest Expense) has been incurred but not paid by increasing the expense with a debit and increasing the related liability with a credit. Later, when the cash payment transaction occurs in the following accounting period, the liability is decreased with a debit, and cash is decreased with a credit. • Accrued revenues: In the related sequence of events, the adjusting entry first records revenues that have been earned but not collected by increasing an asset, such as Accounts Receivable, with a debit and increasing the related revenue with a credit. Later, when the cash collection transaction occurs in the following period, Cash is increased with a debit, and the asset is decreased with a credit.