Chapter 3

What account is increased (credited) for the depreciation cost of a fixed asset?

Accumulated Depreciation

Why are accumulated depreciation accounts called contra accounts?

Accumulated depreciation accounts are deducted from their related fixed asset accounts on the balance sheet.

Unearned Revenues

Advance receipt of future revenues and are recorded as liabilities when cash is received.

How is revenue normally measured?

Assets received

When is an unadjusted trial balance prepared?

At the end of an accounting period

What is the book value of the asset equation?

Book Value of Asset = Cost of the Asset -- Accumulated Depreciation of Asset

Examples of assets received

Cash, accounts receivable

Book value of the asset

Difference between the original cost of the office equipment and the balance in the accumulated depreciation-office equipment accounts

Expense recognition principle

Expenses incurred in generating revenue must be reported in the same period as the related revenue.

(T/F) All fixed assets depreciate

False

(T/F) No accounts require adjustments

False

(T/F) An adjusting entry will never involve a renvenue or an expense account and an asset or a liability account.

False will always*

What asset does not depreciate?

Land

Book value of the asset is also called _____ book value

Net

Deferrals

Occurs when cash related to a future revenue or expense has been initially recorded as a liability or an asset.

Accurals

Occurs when revenue has been earned or an expense has been incurred but has not been recorded

What is the normal balance of a contra account?

Opposite to the account from which it is deducted. Credit (+)

Fixed assets

Physical resources that are owned and used by a business and are permanent or have a long life

Fixed assets are also known as ______ assets.

Plant

Revenue Regonition

Process of recognizing revenues

Accrual Basis of Accounting

Revenue reported when earned Expenses reported when incurred Properly matches revenues and expenses in determining net income Requires adjusting entries at end of period.

Cash basis of accounting

Revenues and expenses are reported on the income statement in the period in which cash is received or paid May be used by most individuals and small service businesses IF they have a small number of receivables and payables and the financial statements are similar to those of the accrual basis For most large businesses, however, the cash basis will not provide accurate financial statements for user needs.

Accrual basis of accounting

Revenues and their related expenses are reported on the income statement in the period in which they are earned (when a service has been performed or a product has been delivered) Requires expenses to be recorded when they are incurred, not necessarily when cash is paid Required by generally accepted accounting principles (GAAP)

Revenue and Expense Recognition

Revenues are recorded when they are earned

Reasons why accounts might need an unadjusted trial balance

Some expenses are not recorded daily Some revenues and expenses are incurred as time passes rather than as separate transactions Some revenues and expenses may be unrecorded at the end of the accounting period.

Adjusting process

The analysis and updating of accounts at the end of the period before the financial statements are prepared

Deprecitation

The decrease in usefulness that occurs over time as a fixed asset loses it ability to provide useful services.

Adjusting Entries

The journal entries that bring the accounts up to date at the end of the accounting period

Depreciation expense

The periodic expense that represents a portion of the cost of a fixed asset's depreciation.

Why is an unadjusted trail balance prepared?

To verify that the total debit balances equal the total credit balances.

(T/F) Adjusting entries are required to properly match revenues and expenses.

True

(T/F) All adjusting entries affect at least one income statement account and one balance sheet account.

True

(T/F) Fixed asset is not decreased (debit or credit?) when making the related adjusting entry.

True (credit)

Adjusting Trial Balance

Verifies the equality of the total debit and credit balances before the financial statements are prepared.

Earned services

When services have been performed or products ahve been delered to customers

Classify the following items as (1) Prepaid Expense (2) Unearned Revenue (3) Accrued expense (4) Accrued Revenue: a. Wages owed but not yet paid b. Supplies on hand c. Fees Received but not yet earned d. Fees earned but not yet received

a-3 b-1 c-2 d-4

The balance in the equipment account is $3,240,000, and the balance in the accumulated depreciation-equipment account is $2,134,000. a. What is the book value of the equipment? b. Does the balance of the accumulated depreciation account mean that the equipment's loss of value is $2,134,000? (Yes/No), because depreciation is an allocation of the (loss of value, cost) of the equipment to the periods benefiting from its use.

a. $1,106,000 b. No, cost

Classify the following items as (1) prepaid expense, (2) unearned revenue, (3) accrued revenue, or (4) accrued expense: a. Cash received for services not yet rendered b. Insurance paid for the next year c. Interest revenue earned but not yet received d. Salaries owed but not yet paid

a. 2 b. 1 c. 3 d. 4

Classify the following items as (1) prepaid expense, (2) unearned revenue, (3) accrued revenue, or (4) accrued expense: a. Cash received for use of land next month b. Fees earned but not received c. Wages owed but not yet paid d. Supplies on hand

a. 2 b. 3 c. 4 d. 1

Indicate with a Yes or No whether or not each of the following accounts normally requires an adjusting entry: a. Cash b. Utilities Expense c. Wages Expense d. Land e. Accounts Receivable f. Unearned Rent

a. N b. Y c. Y d. N e. Y f. Y

Indicate with a Yes or No whether or not each of the following accounts normally requires an adjusting entry: a. Building b. Cash c. Wages Expense d. Miscellaneous Expense e. Nancy Palmer, Capital f. Prepaid Expense

a. No b. No c. Yes d. No e. No f. Yes

What are the normal contra asset account balances or the following fixed assets? a. Land b. Building c. Store Equipment d. Office Equipment

a. None -- Land is not depreciated b. Accumulated Depreciation--Buildings c. Accumulated Depreciation--Store Equipment d. Accumulated Depreciation--Office Equipment

Indicate with a Yes or No whether or not each of the following accounts normally requires an adjusting entry: a. Accumulated Depreciation b. Frank Kent, Drawing c. Land d. Salaries Payable e. Supplies f. Unearned Rent

a. Yes b. No c. No d. Yes e. Yes f. Yes

Prepaid expenses

advance payment of future expenses and are recorded as assets when cash is paid.

What is the difference between adjusting entries and correcting entries?

b. Adjusting entries are a planned part of the accounting process, correcting entries are not planned but arise when necessary to correct errors.

Accumulated depreciation accounts are called _____ accounts, or ________ asset accounts.

contra, contra

The depreciation account is increased (debit or credit?) for the amounts of the depreciation.

debited

Examples of fixed assets

land, buildings, equipment

Expense recognition principle is also known as _____ principle.

matching

Accrued Expenses

unrecorded expenses that have been incurred and for which cash has yet to be paid

Accrued Revenues

unrecorded revenues that have been earned and for which cash has yet to be received