Chapter 3 - Got Its

What different purposes do the general journal and general ledger serve?

General journal - contains the journal entry info in chronological order General ledger - The entire set of accounts for a company. After transactions, events, and arrangements are recorded in the general journal, it updates each account in the general ledger by posting (transferring) the date/debit/credit amounts from journal entries to the accounts in the ledger. Includes the journal entry information within all of the accounts. (T account spreadsheet)

What are the five major steps of the accounting cycle?

1. Record the transactions, events, and arrangements in a journal 2. Post the journal entries to the accounts in the ledger. 3. Prepare and post adjusting entries. 4. Prepare the financial statements. 5. Prepare and post closing entries for the temporary accounts; revenues, expenses, gains, losses, and dividends accounts.

What are adjusting entries, and why are they necessary?

A company must record adjusting entries so that all REVENUES and EXPENSES are recorded in the appropriate period and all assets and liabilities have correct ending balances. Adjusting entries always affect both a permanent (B/S) and a temporary (I/S) account. Four Categories: Deferrals, Accruals, Estimates, and Periodic Inventory.

Explain why companies sometimes recognize deferrals for prepaid expenses and deferred revenues. Give an example of an adjusting entry to update each of these items year end.

A prepaid expense is a good or service purchased but not fully used up by the end of the period (rent, office supplies, insurance, advertising, and licenses). Starbucks had $358.1 million in Prepaid expenses and other current assets, which primarily represents prepaid rent for stores. Effects of AJE for Prepaid Expenses: Decrease asset ---------> increase expense Deferred (unearned) revenues happen when customers pay in advance for the future delivery of good/performances/services (subscriptions, memberships, airfares, sports tickets, gift cards). Starbucks had $1288.5 million in deferred revenue as a current liability , which represents gift cards. Effects of AJE for Deferred Revenues: Decrease liability ------------> increase revenue

What are reversing entries, and why are they used?

A reversing entry is the exact reverse of an adjusting entry. Companies usually make reversing entries immediately following recording the closing entries or on the first day of the next period. OPTIONAL and has one purpose: to simplify the recording of subsequent transactions related to the adjusting entry. Enables companies to routinely record the subsequent transactions without having to consider the possible impact of the prior adjusting entry.

What are special journals, and why are they used? What are the major special journals? Give an example of transactions that would be recorded in each journal.

A special journal enables a company to record specific types of frequent, similar, transactions. When a company increases in size/complexity, it needs to efficiently record and summarize many daily transactions. Special journals are used to: - divide the accounting tasks - reduce the time needed to complete the various accounting activities -create a chronological listing of similar transactions FOUR MOST COMMON TYPES: - Sales Journal: record all sales of merch on credit. - Purchases Journal: record purchases of merch on credit. - Cash Receipts Journal: Record all cash receipts. - Cash payments journal: Record all cash payments.

What are subsidiary ledgers and control accounts, and why are they used? Describe how they work.

A subsidiary ledger is a group of accounts, all of which relate to one specific activity. Used to: - reduce the size of the general ledger - minimize errors -divide the accounting tasks -keep current records of its credit customers and supp. Most companies have separate subsidiary ledgers for accounts receivable and account payable. For example, the accounts receivable subsidiary ledger contains the individual accounts of all the company's credit customers. Because all customer accounts have debit balances, this subsidiary ledger has a total debit balance. **When a subsidiary ledger is used, it still keeps Accounts Receivable in the general ledger (control account)

What are the major financial statements of a company, and what information does each summarize?

Adjusted trial balance - ^^ above Income Statement - Sales revenue - COGS = Gross Profit. VThe various operating expenses are deducted next to get the income from operations. The total amounbt of the other items is deducted to get the income before income taxes. Statement of Shareholders' Equity - After I/S, before the B/S, ending balances in the SE accounts, including Retained Earnings, must be computed so they can be included in the B/S. Balance Sheet - Current/Noncurrent Assets, Current/Noncurrent Liabilities (One year rule), Statement of Cash Flows - reports for a period of time the net cash flows (Inflows - Outflows) from operating, investing, and financing activities.

Explain why companies sometimes recognize accruals for accrued expenses and accrued revenues. Give an example of an adjusting entry to record each of these items.

An accrued expense is an expense that has been incurred but has not yet been paid. Starbucks had $1934.5 million in accrued expenses as current liabilities in the Accrued Liabilities account. Effects of AJE for accrued expenses: Increase Liability -------------> Increase Expense Accrued revenues are assets that represent amounts that a company is entitled to recieve because it has satisfied performance obligations to customers, but has not yet receiveed. Most common form is when a company sells goods/services to customers on credit, debited Accounts Recievable and crediting Sales Revenues. Effects of AJE for Accrued Revenues: Increase Asset ----------> Increase Revenue

Show the expanded accounting equation using the 10 elements of financial accounting.

Assets = Liabilities + Shareholders' Equity Shareholders' Equity = Contributed Capital + Retained Earnings + AOCI (Accumulated Other Comprehensive Income) Retained Earnings = Beg. Retained Earnings + Net Income - Dividends Net Income = Revenues - Expenses + Gains - Losses

What are closing entries, and what are their purpose?

Closing entries are journal entries that a company makes at the end of the period to: - reduce the balance in each temporary (periodic) account to zero - update the Retained Earnings account

Explain and provide examples of deferrals, accruals, and estimates.

Deferrals - when cash flows occur prior to recognition of an item in income (prepaid expenses and deferred (unearned) revenues) Accruals - When cash flows occur after recognition of an item in income (wages payable and accounts receivable) Estimates - Recognized amounts on the balance sheet and income statement that are not known with certainty and must be estimated (depreciation expense and bad debt expense)

Explain how the accounting equation organizes financial information using T-accounts and debts and credits.

Each T-account has a debit (left) and credit (right). In the double entry system, all accounts on the left side of the accounting equation (assets) are increased by debits and decreased by credits. (except temporary EXPENSE AND LOSS accounts.) All accounts on the rights side of the equation are increased by credits and decreased by debits.

What is the purpose of the Income Summary account in closing?

In closing, temporary income statement accounts with credit balances (ex: Revenues) are debited and the total of the debits is credited to a temporary closing account called the INCOME SUMMARY. Accounts with debit balances (ex: expenses) are credited and the total of the credits to these accounts is debited to INCOME SUMMARY. A left over credit balance in the I/S is the net income for the period...... this credit balance is closed to zero with a debit to I/S and credit to Retained Earnings. If there is a debit balance, there is a net loss for the period. This debit balance is closed to zero with a credit to I/S and a debit to Retained Earnings. Finally, the dividends account is credited, and retained earnings is debited.

Why is it advantageous to a company to initially record each of its transactions in a journal?

It helps prevent errors/easier to verify the equality of debits and credits. All information is recorded in chronological order in one place, making it easier to audit or discover errors later in the accounting cycle.

What is a perpetual inventory accounting system? What journal entries are involved?

It is when the inventory account is updated for each purchase or sale. Used by a company that purchases products from suppliers then resells this inventory to commercial customers. When the company buys inventory on credit, it records the increase (debit) in assets in the Inventory account and an increase (credit) in the liabilities account. When it makes a sale, two journal entries are made. First one records a debit for the increase in Cash (or accounts recievable) and a credit for the Sales Revenue. The second entry records an increase (debit) in COGS and decrease (credit) in the Inventory account for the cost of inventory sold.

Give two examples of adjusting entries to record estimated items. include in one example a discussion of how straight-line depreciation expense is computed.

Jayme Corp has 2 depreciable assets, the building and equipment aquired March 30, 2019. Assets have lives of 35 years and 12 years. Jaymie estimates residual value of the building will be $3000 and equipment will be $200 at the end of these lives. because they were only used for 9 months in 2019, depreciation expense is as follows: Building: $264 = [($15,320 - $3000) / 35] x 9/12 Equipment: $120 = [($2120 - $200) / 12] x 9/12 AJE for the building is a debit (increase) to Depreciation Expense: Building for $264 and a credit (increase) to Accumulated Depreciation: Building for $264. The result is an increase in expenses and a decrease in the book value that the company reports on its B/S for the building and equipment. -------------------------------------------------------------- Bad Debts Expense: Jaymie Corp estimates its bad debts to be 1% of total sales. Sales revenues totals $17,000, so the AJE is a debit (increase) to Bad Debts Expense for $170 and a credit (increase) to Allowance for Doubtful Accounts for $170. The result is an increase in expenses and a decrease in the accounts receivable shown on the company's balance sheet.

What is the difference between a permanent and a temporary account? Give examples of each.

Permanent accounts = the asset, liability, and SE accounts. Balances at the end of the period are carried forward to the next. Temporary (Periodic) accounts = used to determine the changes in retained earnings that occur DURING a period. Account balances are not carried forward. (Revenue, expense, gain, loss, and dividend accounts)

Give an example of an adjusting entry and a reversing entry for salaries payable, and the later entry to pay the salaries.

Reversing entries are made for adjusting entries that create a NEW B/S account at the end of the period for transactions that will be completed during the next period. (accrue revenues/expenses, defer costs, defer revenues) -------------------------------------------------------------- Accrued Revenue Adjusting Entry Dr. Salaries Expense 900 Cr. Salaries Payable 900 Sbsequent entry Dr. Salaries Expense 1800 Cr. Cash 1800 -------------------------------------------------------------- If reversing entry is not made: Dr. Salaries Expense 900 Dr. Salaries Payable 900 Cr. Cash 1800

What is a periodic inventory system? How is COGS computed when a company uses a periodic inventory system?

Small companies use a periodic inventory system to record inventory purchases in a Purchases account so that the Inventory account does not change during the period. Also, at the time of the sale, the company does not make a 2nd journal entry to record the increase in COGS and the decrease in inventory. Instead, it takes physical inventory at the end of the period. The company then gets its COGS by first computing its Cost Of Goods Available For Sale. COGAFS = Beginning Inventory + Net Purchases COGS = COGAFS - Ending Inventory The company then makes adjusting entries to close the Purchases account into the Inventory account, and to reduce the Inventory account for the COGS.

What is the relationship between the accounting equation and the double entry system of recording journal entries?

The accounting equation provides the framework for the accounting system and is the structure in which companies record transactions, events, and arrangements. Assets are the company's economic resources, liabilities are its obligations owed to creditors, and shareholders equity is the shareholders residual interest in the company's assets after the liabilities have been satisfied. In the double-entry accounting system, for each transaction, event, or arrangement that a company records, the total amount of the debits must be equal to the total amount of credits.

What is the primary purpose of an accounting system?

To record, organize, summarize, and report useful info to external financial statement users and stakeholders, as well as to the company's managers for making operating, investing, and financing decisions.

Explain and distinguish between a transaction, event, and arrangement.

Transaction - involved the transfer/exchange of resources between the company and another party ex: purchase of inventory from a supplier or the sale of a product or service to a customer Event - an occurrence that affects the company. The event may be internal (using equipment in operations) or external (gain in the fair value of an investment security) Arrangement - agreement or promise by the company with another party. ex: a company may have agreements such as warranties to repair defective products sold to customers/promises to pay pension and other retirement benefits to employees.

What is the purpose of a trial balance?

Trial balance = a worksheet that lists all the general ledger accounts and their balances. It is used to verify that the total of the debit balances is equal to the total of the credit balances.

Give an example of transactions that: a. Increase an asset and a liability b. Increase an asset and shareholders' equity c. Increase an asset and decrease a different asset d. Decrease an asset and a liability e. Decrease an asset and shareholders' equity

a. Jaymie purchased $7,300 of inventory on credit from Bark Company. b. Various shareholders invest in Jaymie by purchasing 2,000 shares of no-par stock at $10 per share. c. Jaymie purchases a 1-year comprehensive insurance policy for $360. d. Jaymie pays $7,300 to bark for investory purchased on 3/31?????? e. Jaymie distributes dividends of $500 (0.25 per share for 2000 shares) to shareholders

Give examples of transactions that: a. Increase inventory and a liability b. Decrease inventory and a liability c. Increase inventory and decrease an asset d. Decrease inventory and increase an asset

a. Jaymie purchases $1,900 of inventory on credit from Ajax Company. b. Returned Purchased Merchandise ???? c. Jaymie purchases inventory for $3,300 cash. d. Jaymie sells inventory to customers for $8,000 cash. The cost of the inventory was $5,090.

Define the following: a. account b. contra account c. general ledger d. journal e. posting

a. used to store the recorded monetary info from its transactions, events, and arrangements (Cash, Accounts Receivable, Buildings, Accounts Payable, Wages Payable, Sales Revenue, COGS, Salaries expense, common stock, retained earnings, and dividends. b. used to show a reduction in a related account. (ex:Accumulated depreciation is a contra account used to accumulate the depreciation recorded for PPE) c. Entire set of accounts for a company. d. Where companies record transactions, events, and arrangements. They consist of: - date column - column to list the titles of the accounts affected by each entry - column to list the account numbers - debit column and credit column to list amounts recorded as debit or credit to each account

What is the difference between a trial balance and an adjusted trial balance? Why are both useful?

adjusted trial balance - lists all the account and account balances AFTER adjustments (but before closing) in either a debit or a credit column. It is used to verify that the debit total is equal to the credit total.