Accounting Chapters 4-5

Closing Process

1. Close all revenue accounts to income summary 2. Close all expense accounts to income summary 3. Close all Income summaries to Retained earnings 4. Close all dividends to Retained Earnings

Accumulated Depreciation

A contra-asset account shown as a deduction from the related asset account in the balance sheet. Depreciation taken throughout the useful life of an asset is accumulated in this account.

Adjusted Trial Balance

A schedule indicating the balances in ledger accounts after end-of-period adjusting entries have been posted. The amounts shown in the adjusted trial balance are carried directly into financial statements.

After-Closing Trial Balance

A trial balance prepared after all closing entries have been made. Consists only of accounts for assets, Liabilities and owner's equity.

Contra-asset account

An account with a credit balance that is offset against or deducted from an asset account to produce the proper balance sheet amount for the asset.

Unearned revenue

An obligation to deliver goods or render services in the future, stemming from the receipt of advance payment.

Deferral

Asset created by a cash expenditure that will benefit more than one accounting period. Postponement of and expense.

Prepaid Expenses

Assets representing advance payment of the expenses of future accounting periods. As time passes, adjusting entries are made to transfer the related costs from the assets account to an expense account.

Current Assets

Cash and other assets that can be converted into cash or used up within a relatively short period of time without interfering with normal business operations.

Depreciation expense (Per Period)

Cost of Asset divided by Estimated Useful Life

Working Capital

Current Assets - Current Liabilities

Current Ratio

Current Assets/ Current Liabilities

Adjusting Entries

Entries made at the end of the accounting period for the purpose of recognizing revenue and expenses that are not properly measured as a result of journalizing transactions as they occur.

Current Liabilities

Existing obligations that are expected to be satisfied with a company's current assets within a relatively short period of time.

Interim Financial Statements

Financial statements prepared for periods of less than one year (monthly and quarterly)

Closing Entries

Journal entries made at the end of the period for the purpose of closing temporary accounts (revenue, expenses, dividends) and transferring balances to the Retained Earnings statement.

Estimated Quarterly Payments

Liability to governmental tax authorities because a of Earned taxable income paid in four installments.

Worksheet

Multicolumn schedule showing the relationship among the current account balances (trial balance), proposed or actual adjusting entries or transactions, and the financial statements that would result if these adjusting entries or transactions were recorded. Used for preparing financial statements and planning purposes.

Profitability Calculations for Company

Net Income Percentage and Return on Equity

Return on Equity

Net Income/ Average of Stockholders equity (Beginning of time frame, end of time frame)

Net Income Percentage Formula

Net Income/Total Revenue

Matching (Principle)

Offsetting revenue with the expenses incurred in producing that revenue. Requires recognition of expenses in the periods that the goods and services are used in the effort to produce revenue.

Income Statement

Other Names - Profit & Loss (P&L), Statement of Operations, Earnings Statement

Depreciable Assets

Physical objects with a limited life. The cost of these assets is gradually recognized as a depreciation expense.

Retained Earnings

Portion of stockholder's equity created by earning net income and keeping (retaining) the related resources in the business.

Realization Principle

Principle that governs the timing of revenues recognition. Revenue should be recognized in the period in which it was earned.

Immaterial

Something of little or no consequence. Immaterial items may be accounted for in the most convenient manner, without regard to other theoretical concepts.

Notes

Supplemental disclosures that accompany financial statements. Provide information to properly interpret information on financial statements.

Depreciation

Systematic allocation of the cost of a depreciable asset to expense over the assets useful life.

Adequate Disclosure

The GAAP of providing with financial statements any information that users need to interpret those statements properly.

Book Value

The net amount at which an asset appears in financial statements. For depreciable assets, book value represents cost minus accumulated depreciation. Called "Carrying Value"

Useful Life

The period of time that a depreciable asset is expected to be useful to the business. This is the period over which the cost of the asset is allocated to depreciation expense.

Materiality

The relative importance of an item or amount. Items significant enough to influence decision are said to be "material." Items lacking this importance are called "immaterial." The accounting treatment accorded to immaterial items may be guided by conveniences rather than by theoretical principles.

Income Summary

The summary account in the ledger to which revenue and expense accounts are closed at the end of the period. The balance (credit balance for net income, debit balance for net loss) is transferred to the Retained Earnings statement.

Straight-Line Method of Depreciation

The widely used approach of recognizing an equal amount of depreciation expense in each period of a depreciable asset's useful life.

Purpose of Adjusting Entries

To Assign to each accounting period appropriate amounts of revenue and expense.

Accrue

To grow or accumulate over time

Income Statement

Used to summarize the operating results of a business by matching the revenue earned during a given period of time w/ the expenses incurred generating that revenue.

Liquidity Calculations for Company

Working Capital and Current Ratio