Accounting Exam 1: Chapter 2

Debits and Credits Dividends

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Debits and Credits Expenses

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Debits and Credits Assets

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______are required to bring accounts up to date at the end of the accounting cycle. Analyze all accounts and determine if an adjusting journal entry is required to bring the account up to date.

Adjusting Journal Entries

made at the end of the accounting period before the books are closed. ____ bring all the accounts up to date on an accrual basis and are an essential step in the accounting cycle before the company can prepare accurate financial statements

Adjusting journal entries

After estimating the amount of bad debts for the current period the company will record a bad debt and an associated contra asset called _____

Allowance for Doubtful Accounts or Allowance for Bad Debts

The fomula to compute Cost of Goods Sold is as follows:

Beginning of Year Inventory Plus: Purchases of Inventory Equals: Goods Available for Sale Less: Ending Inventory Equals: Cost of Goods Sold

To the extent that a company sells products or services in the current period and where they can reasonably estimate that they will not collect the entire amount they are required to recognize a _____ associated with the current period's revenue.

bad debt expense

The _____ is prepared AT A SPECIFIC POINT IN TIME (i.e. at the end of the accounting period which is generally at the end of the year).

balance sheet

Depreciation is NOT a valuation issue, it is a ___

cost allocation.

Closing Journal Entries are required to close out all nominal accounts which includes all income statement accounts which are?

revenue, income, gains, expenses and loss accounts and dividend

Debits and Credits Common Stock

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Debits and Credits Liabilities

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Debits and Credits Retained Earnings

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Debits and Credits Revenues

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Which is the order of the financial statements?

1) Income statement 2) Statement of Retained Earnings 3) Balance Sheet 4) Statement of Cash Flows

shows all open account balances from the general ledger AFTER adjusting journal entries are made

adjusted trial balance

If the transaction or event impacts one of the financial statement elements then record it with a journal entry in the General Journal often referred to as the _________

"Book of Original Entry".

The FASB uses the following to describe when an event or transaction should be recorded in the accounts:

"transactions and other events and circumstances that affect a business enterprise"

When cash is received prior to the performance of services or provision of goods the revenue is not yet earned and therefore recognized. The revenue recognition rules require that revenue be realized (cash received) or realizable (a receivable is booked) AND earned. Cash received prior to the performance of goods or provision of services only meets the first part of the revenue recognition requirements and is therefore a liability (owe goods or services) until earned.

Deferred Revenues Cash XXX (Asset, Debit, Balance Sheet) Deferred Revenue XXX (Liability, Credit, Balance Sheet)

represents payments to owners or an owner's return on investment. The payment of dividends reduces the retained earnings account.

Dividends

The amount of interest to accrue depends on three things: the face amount of the liability, the annual interest rate and the time outstanding stated in terms of one year. This amount can be calculated as follows:

Face Value of Note X Annual Interest Rate X Time in Terms of One Year = Interest Expense And Accrued Interest

A sole proprietorship or partnership will generally have the following accounts in the stockholder's equity section:

Owner's capital Owner's drawing account

represents the ownership interest in the company and is similar to the common or capital stock account in a corporation

Owner's capital:

represents payments to owners or an owner's return on investment. This is similar to the dividends account in a regular corporation and the payment of an owner's draw reduces the owner's capital account.

Owner's drawing account

represents the amount that the investor paid to purchase the stock that exceeds the par value of the stock.

Paid in capital in excess of par

The payment of cash for an expense prior to the time it is actually consumed or used.

Prepayment of Expenses Prepaid Expense XXX (Asset, Debit, Balance Sheet) Cash XXX (Asset, Debit, Balance Sheet)

There are four types of adjusting journal entries:

Prepayment of Expenses (deferrals) Deferred Revenues (deferrals) Accrued Receivables (Revenue) (accruals) Accrued Liabilities (Payables) (accruals)

Specials Journals

Read the section in the textbook regarding special journals. This section is fair game for multiple choice questions on the exam.

is a permanent account. This means that the balance in the account never closes out. The balance at the end of the prior accounting period becomes the opening balance at the beginning of the next accounting period. Accounting periods are broken down into specific blocks of time (generally one year) for easier measurement of results.

Real or Permanent Accounts

Balance Sheet All asset accounts and their related contra accounts with ending balance are reflected on the ____ or on the top (in a top to bottom balance sheet) on the balance sheet. All liabilities and their related contra accounts as well as all stockholder's equity and their related contra accounts with ending balance are reflected on ____ or on the bottom (in a top to bottom balance sheet) of the balance sheet.

left side (in a side to side balance sheet) the right side (in a side to side balance sheet)

An item should be recognized in the financial statements if it impacts an element, is ____

measurable, is relevant and is representationally faithful.

Certain ledger accounts require more detail which is generally maintained in what is referred to as a _______. For example, the Accounts Receivable account tells us the dollar amount owed to the company for sales made on account (non-cash sales). The balance in this account however consists of multiple customers each owing different amounts. In this regard the company can look at any one subsidiary ledger to determine how much an individual customer owes on account.

subsidiary ledger.

Accounting Cycle

1) Analyze transactions or events 2) Journal Entries 3) Post all Journal Entries to the General Ledger (Referred to as "Posting") 4) Prepare the Unadjusted Trial Balance 5) Prepare Adjusting Journal Entires 6) Prepare the Adjusted Trial Balance 7) Prepare the Financial Statements: The Income Statement MUST be prepared first 8) Prepare the Financial Statements: The Statement of Retained Earnings MUST be prepared second. 9) Prepare the Financial Statements: The Balance Sheet MUST be prepared third. 10) Prepare the Financial Statements: The Statement of Cash Flows is the last of the four general purpose financial statements to be prepared. 11) Prepare Closing Journal Entries 12) Prepare a Post Closing Trial Balance 13) Prepare Reversing Journal Entries

Adjusting journal entries are necessary because:

1.) Events that are not recorded on a daily basis (wages) 2.) Expenses that accrue with the passage of time (for example the accrual of interest expense for the use of borrowed funds) 3.) Items that have not been recorded but relate to the current period need to be properly recorded. For example suppose real estate bill for the building for current year received after end of accounting period.

A DEBIT INCREASES THE FOLLOWING TYPES OF ACCOUNTS:

ASSETS EXPENSES LOSSES DIVIDENDS CONVERSELY, A CREDIT DECREASES THESE SAME ACCOUNTS.

Results when an expenses has been incurred but has not yet been paid in cash. GAAP requires a matching of expenses with revenues. To the extent an expense has been incurred but not yet paid it must be accrued for on the books.

Accrued Liabilities (Payables) Expense XXX (Expense, Debit, Income Statement) Accrued Expense Payable XXX (Liability, Credit, Balance Sheet)

Results when revenue is earned for services rendered or goods provided prior to receiving the cash.

Accrued Receivables (Revenue) Accounts Receivable XXX (Asset, Debit, Balance Sheet) Earned Revenue XXX (Revenue, Credit, Income Statement)

______ is revenue that has met the revenue recognition criteria but no cash has been received yet.

Accrued revenue

Under the historical cost principle depreciation is never recorded directly as a reduction of the asset account but is rather tracked in a contra account called __

Accumulated Depreciation.

All Adjusting Journal Entries should be shown in the Adjustment columns (when using a worksheet) and appropriately footed across to obtain the adjusted balance in the account and thus the ending balances on the ________.

Adjusted Trial Balance.

Expanded Accounting Equation

Assets = Liabilities + Common stock + Retained Earnings - Dividends + Revenues -Expenses

The Accounting Equation

Assets= Liabilities+Stockholder's Equity

The formula to compute RETAINED EARNINGS is as follows:

Beginning of Year Retained Earnings Plus: Net Income* OR Minus: Net Loss* Minus: Dividends Equals: End of Year Retained Earnings

represents the ownership interest in the company.

Capital or common stock

A regular corporation (such as a C Corporation and an S Corporation) have the following accounts WITHIN THE STOCKHOLDER'S EQUITY SECTION:

Capital or common stock Paid in capital in excess of par Retained earnings Dividends

Debits and Credits for: Assets Liabilities Stockholders Equity

D | C + | - Assets - | + Liabilities - | + Stockholders Equity

The ______ keeps a running total of the balance (debit or credit) for each account. In this class we will use T accounts

General Ledger

Prepare a Post Closing Trial Balance All accounts with ending balances are taken from the ___ to prepare the Post Closing Trial Balance. After closing entries are prepared above the ONLY accounts that should have a balance are _____. Shows ALL accounts that have debit balances on the left and right side regardless of the account to which they relate. Debits must ____ credits. Only reflects assets, liabilities and stockholder equity accounts since all nominal accounts have been closed out to retained earnings

General Ledger; REAL accounts (balance sheet accounts); Equal;

The straight-line method simply divides the estimated useful life into the historical cost of the asset as follows:

Historical Cost of the Asset/ Estimated Useful Life= Yearly Depreciation Charge X # of months in service during C/Y/ 12 months in a year

A CREDIT INCREASES THE FOLLOWING TYPES OF ACCOUNTS

LIABILITIES INCOME OR REVENUES GAINS EQUITY CONVERSELY, A DEBIT DECREASES THESE SAME ACCOUNTS.

Accounts that are found on the income statement are this accounts and include income, revenue, expense, gain, loss and the dividend account which is the only ______ balance sheet account

Nominal

Prepare Closing Journal Entries All income and gain accounts (nominal accounts) are closed out to _____ All expense and loss accounts (nominal accounts) are closed out to _______ Dividends are closed out to_____ The closing entries allow nominal accounts to start out with a _____in the next accounting period in order to measure net income using logical accounting periods (generally one year)

Retained Earnings; Retained Earnings; retained earnings; zero balance

represents earnings (net income) that have been retained in the business for future use.

Retained earnings

The ____ provides detailed information regarding the sources and uses of cash from the beginning of the period to the end of the period.

Statement of Cash Flows

All accounts with ending balances are taken from the General Ledger to prepare the _______ -Shows ALL accounts that have debit balances on the left side regardless of the account to which they relate. -Shows ALL accounts that have credit balances on the right side regardless of the account to which they relate. debits must ___credits Prepare the ____ BEFORE adjusting journal entries are made.

Unadjusted Trial Balance; equal; Unadjusted Trial Balance

The preparation of the financial statements comes directly from the _____

adjusted trial balance.

When cash is received prior to the performance of services or provision of goods it does not meet the first part of the revenue recognition rules. As such it must first be recorded as a liability called ____

deferred Revenue

A trial balance (does/does'nt) prove that the general ledger is correct or that all transactions were recorded.

doesnt!!! (Many errors can still exists within the accounting system including failing to record an event that should have been recorded, posting a journal entry twice, using incorrect accounts when recording a journal entry, omitting the posting of a correct journal entry or making offsetting errors in recording the amount of a transaction).

The regular accounting equation shows the relationship between the _____. That is, for every debit there must be an equal amount of credits and vice versa

double entry accounting system

Accrual accounting requires proper revenue recognition when revenues are ____. It also requires that expense be matched with the appropriate revenue. Accordingly adjusting journal entries are required in order that revenue and expenses be recognized in the appropriate accounting period.

earned and received or receivable

Beginning of period retained earnings for the current period = _______ (both are real accounts which do not close out at the end of the accounting period). Beginning of period retained earnings + ____ = end of period retained earnings.

ending retained earnings from prior period; net income (OR minus a net loss) from the income statement prepared above

The _____ measures results of operations and is prepared FOR A PERIOD OF TIME (i.e. the accounting period which is generally a year).

income statement

All income and gain accounts (nominal accounts) are netted with all expense and loss accounts (also nominal). The net result is ______ if all income and gain accounts exceed expenses and losses. The net result is a ______ if all expenses and losses exceed all income and gain accounts.

net income; net loss

The ______ in an account indicates which type of entry (debit or credit) is needed to increase the account. See above for accounts that are increased with debits (assets, expenses, losses and dividends). Likewise see above for accounts that are increased with credits (liabilities, income/revenue, gains and equity).

normal balance

In order for a journal entry to be required a recordable transaction or event has to have ____.

occurred

Without an adjusting journal entry for depreciation the asset side of the balance sheet is ____ as is net income. The _____of net income is because of an ____ in depreciation expense. If net income is ____ then so is retained earnings and stockholder's equity

overstated; overstatement; understatement; overstated; overstated

Without an adjusting journal entry for the usage of a prepaid expense the asset would be _____ , expenses would be _____which results in an ______ of net income and thus an _____ in retained earnings and stockholder's equity.

overstated; understated; overstatement; overstatement

Without an adjusting journal entry for the use of prepaid insurance (through the passage of time) assets would be ____, expenses (insurance expense) would be ____ which results in an ____of net income and thus an ____ in retained earnings and stockholder's equity.

overstated; understated; overstatement; overstatement

is prepared AFTER closing entries are made. It represents only the remaining real accounts since the nominal accounts have been closed out and have zero balances.

post closing trial balance

shows all open account balances from the general ledger BEFORE adjusting journal entries are made

unadjusted trial balance

Without an adjusting journal entry for accrued expenses the expenses of the company would be ___ and therefore income would be ___ and so would retained earnings and stockholder's equity. In addition, liabilities would be ___.

understated; overstated; understated

Without an adjusting journal entry for accrued revenue the revenue of the company would be ____ and therefore so would retained earnings and stockholder's equity. In addition assets would also be ____.

understated; understated