Accounting Chapter 4

The steps in the Accounting Cycle

(1) Analyze transactions (2) Journalize transactions (3) Post to the ledger (4) Prepare an unadjusted 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

What kind of an account is an Accrued Expense?

A liability

What kind of an account is a Deferred Revenue (Unearned Revenue) Account?

A liability. Goods or services are "owed" to the customer

Which accounting basis (cash or accrual) requires adjusting entries?

Accrual

What kind of an account is a Prepaid Expense?

An Asset. It is a future economic benefit.

Time Period Assumption

Artificial time periods used for reporting purposes to provide information to users of financial statements over a company's life

Unexpired costs are called ________

Assets

When are adjusting entries made?

At the end of the accounting period before financial statements are prepared

In an adjusting entry at least one _________ account and one __________ account are affected

Balance Sheet; Income Statement

Why is Historical Cost Principle used to measure the amount recognized in the financial statements for assets?

Because it is reliable and verifiable

Difference between Cash and Accrual Accounting

Cash Accounting: Revenues are recorded when cash is received for them. Expenses are recorded when cash is paid for them. Accrual Accounting: Revenues are recorded when realized or realizable and earned. Expenses are recorded when incurred (used or expired).

Deferred (prepaid) Expense

Cash paid before expense is incurred

Deferred Revenue

Cash received before revenue is earned

What is the formula for straight-line depreciation?

Cost - Residual Value/Estimated useful life OR depreciable cost/life

Accrued Liability (accrued expense)

Expense incurred before cash is paid

Expired costs are called ________

Expenses

Under Accrual Accounting, when are expenses recognized?

Expenses are recorded when incurred (used or expired) to generate revenues

Revenues

Inflows of assets or settlements of liabilities from delivering products or services

Which item on the Conceptual Framework gives the guidance as to when expenses should be recognized?

Matching Principle

Will the Net Income reported on the Income Statement and the Cash from Operating Activities on the Statement of Cash Flows be the same amount under Accrual Accounting?

No

Expense

Outflows of assets or incurrences of liabilities resulting from the delivery of products or services

Which item on the Conceptual Framework gives the guidance as to when revenue should be recognized?

Revenue Recognition Principle

Accrued Asset (accrued revenue)

Revenue earned before cash is received

Under Accrual Accounting, when is revenue recognized?

Revenues are recorded (recognized) when realized or realizable and earned

Ethical Pressures related to Accrual Accounting

The accountant's primary responsibility in preparing financial statements is to portray the affairs of the company accurately to the various outside users. The accountant may feel pressure from others within the organization to speed or delay recognition of certain adjustments.

Unit of measure used to record and report elements in the financial statements

The monetary unit

Why are adjusting entries made?

To bring all accounts up to date and ensure all transactions are recorded before the financial statements are prepared. OR Revenue recognition principle, matching principle, and Time period assumption OR to record all revenues earned and expenses incurred for the period.

Recognition

To record in the company's books

When would a company have Deferred Revenue (Unearned Revenue)?

When it has received cash from a customer before delivering goods or services to that customer

When would a company have Accrued Expenses?

When it has used an asset or service, but has not yet recorded it or paid for it

When would a company have Accounts Receivable?

When it makes a sale or provides services "on account". The customer will be billed and the company will receive payment from the customer in the future.

When would a company have Prepaid Expenses?

When it pays for goods or services before using them

Will the Net Income reported on the Income Statement and the Cash from Operating Activities on the Statement of Cash Flows be the same amount under Cash Accounting?

Yes