Financial & Managerial Accounting
Expense Recognition Principle
Matching Principle; Expenses be recorded in the same accounting period as the revenues that are recognized as a result of those expenses Recording expenses early understates current-period income; recording it late overstates current-period income.
Reversing Entries
Optional Enter Dr. to payable account and Cr. to expense account on first day of period, clearing out payable account. When expense is paid, Dr. expense account and Cr. cash account.
Steps to Prepare Financial Statements
1) Prepare income statement using revenue and expense accounts. 2) Prepare statement of retained earnings using net income from income statement, retained earnings, and dividends. 3) Prepare balance sheet using assets, liabilities, and common stock. 4) Prepare statement of cash flows from changes in cash flows for the period.
Post-Closing Trial Balance
A list of permanent accounts and their balances after all closing entries. Verifies that total debits equal total credits for permanent accounts and all temporary accounts have zero balances.
Income Summary
A temporary account only used for the closing process.
Current Ratio
Assesses a company's ability to pay its debts in the near future. Current ratio = Current assets/Current liabilities Current ratio over 1.0 = current liabilities can be covered with current assets Current ratio under 1.0 = unable to cover current liabilities with current assets
Accrued Interest Expense
Accrued interest expense from notes payable, loans, and other long-term liabilities at the end of a period. Principal amount owed x Annual interest rate x Fraction of year since last payment
Contra Account
An account linked to another with an opposite normal balance. Reported as a subtraction from the other account's balance.
Closing Process
Completed at the end of an accounting period after financial statements are complete. 1) Identify accounts for closing 2) Record and post the closing entries 3) Prepare a post-closing trial balance Resets revenue, expense, and dividends account balances to zero at the end of each period. Updates Retained Earnings account on the balance sheet.
Accumulated Depreciation
Contra account. Normal Cr balance, decreases the assets reported value.
Accrued Expenses
Costs that are incurred in a period that are both unpaid and unrecorded. Reported on the income statement for the period when incurred. Recognizes expenses incurred in a period but not yet paid. Dr. Expense Cr. Liability
Framework for Adjustments
Deferral of expense Deferral of revenue Accrued expense Accrued revenue 1) Determine what the current account balance equals. 2) Determine what the current account balance should equal. 3) Record an adjusting entry to get from step 1 to step 2.
Depreciation of Assets Journal Entry
Dr. Depreciation Expense Account Cr. Accumulated Depreciation Account
Prepaid Expense Used Journal Entry
Dr. Expense Account Cr. Prepaid Account
Accrued Expense Journal Entries
Expense Owed but Not Paid Dr. Expense Account Cr. Payable Account Payment of Accrued Expense Dr. Payable Account Dr. Expense Account Cr. Cash Account
Classified Balance Sheet
Organizes assets and liabilities into subgroups. No required layout. Typical Categories: Current Assets: expected to be used within one year or one accounting period, whichever is shorter Long-Term Investments: expected to be held for longer than a year Plant Assets: tangible that are both long-lasting and used to produce or sell products and services Intangible Assets: long-term assets that lack a physical form Current Liabilities: expected to be due or paid for within one year or one accounting period, whichever is shorter Long-Term Liabilities: expected to be due or paid longer than a year Equity: common stock and retained earnings
Plant Assets
Plant & Equipment; Property, Plant, & Equipment. Special category of prepaid expenses. Long-term tangible assets used to produce and sell products and services. Provide benefits for more than one period. Expense recognized via depreciation.
Deferral of Expense
Prepaid expenses; assets paid for in advance of receiving their benefits. When the assets are used the advanced payments become expenses. Dr. Expenses Cr. Assets
Unearned Revenue Journal Entries
Record Unearned Revenue Dr. Cash Account Cr. Unearned Revenue Account Reduce Unearned Revenue Dr. Unearned Revenue Account Cr. Revenue Account
Accrual Basis Accounting
Record revenue when services and products are delivered and record expenses when incurred (matched with revenues).
Cash Basis Accounting
Record revenues when cash is received and record expenses when cash is paid.
Adjusting Entry
Reflects a transaction or event that is not yet recorded. Affects one or more income statement accounts and one or more balance sheet accounts, but never the Cash account.
Temporary Accounts
Relate to one accounting period. Includes all income statement accounts, the dividends account, and the Income Summary.
Permanent Accounts
Report on activities related to one or more future accounting periods. Includes all balance sheet accounts, asset, liability, and equity accounts. Not closed at the end of an accounting period.
Profit Margin
Return on Sales; Ratio of net income to net sales. Profit margin = Net income/Net sales Higher percentage is better
Accrued Revenue Journal Entries
Revenue Earned but Not Paid Dr. Accounts Receivable Cr. Revenue Account Receipt of Accrued Expense Dr. Cash Account Cr. Accounts Receivable Cr. Revenue Account
Revenue Recognition Principle
Revenue be recorded when goods or services are provided to customers and at an amount expected to be received from customers. Adjustments ensure revenue is recognized in the time period when those services and products are provided. Recording revenue early overstates current-period income; recording it late understates current-period income.
Adjustment Principles
Revenue recognition principle Expense recognition (matching) principle
Accrued Revenue
Revenues earned in a period that are both unrecorded and not yet received in cash or assets. Usually come from services, products, interest, and rent. Service fees and interest. Recorded when adjusting entries are made at the end of the accounting period. Dr. Asset Cr. Revenue
Accounting Cycle
The steps in preparing financial statements. Occur Regularly as Transactions are Entered: 1) Analyze transactions 2) Journalize 3) Post Occur at the End of the Period 4) Prepare unadjusted trial balance 5) Adjust and post accounts 6) Prepare adjusted trial balance 7) Prepare financial statements 8) Close accounts 9) Prepare post-closing trial balance Optional 10) Reverse and post
Closing Entries
Transfer end-of-period balances in revenue, expense, and dividends accounts to Retained Earnings. 1) Close income statement credit balances 2) Close income statement debit balances 3) Close Income Summary account 4) Close dividends account
Adjusted Trial Balance
Trial balance prepared after adjusting entries.
Unadjusted Trial Balance
Trial balance prepared before adjusting entries.
Deferral of Revenue
Unearned revenue; Cash received in advance of providing products and services. Liabilities. When cash is accepted, an obligation to provide products or services is accepted. As products and services are provided the liability decreases and the unearned revenues become earned revenues Dr. Liability Cr. Revenue
On November 1, Stockton Co. receives $3,600 cash from Hans Co for consulting services to be provided evenly over the period November 1 to April 30 - at which time Stockton credits $3,600 to Unearned Consulting Fees. The adjusting entry on December 31 (Stockton's year-end) would include a a. Debit to Unearned Consulting Fees for $1,200 b. Debit to Unearned Consulting Fees for $2,400 c. Credit to Consulting Fees Earned for $2,400 d. Debit to Consulting Fees Earned for $1,200 e. Credit to Cash for $3,600
a. Debit to Unearned Consulting Fees for $1,200 Consulting Fees Earned = $3,600 x (2/6) = $1,200, adjusting entry is Dr. Unearned Consulting Fees for $1,200, Cr. Consulting Fees Earned for $1,200.
On May 1 of the current year, a two-year insurance policy was purchased for $24,000 with coverage to begin immediately. What is the amount of insurance expense that appears on the company's income statement for the current year ended December 31? a. $4,000 b. $8,000 c. $12,000 d. $20,000 e. $24,000
b. $8,000 Insurance expense = $24,000 x (8/24) = $8,000; adjusting entry is: Dr. Insurance Expense $8,000, Cr. Prepaid Insurance for $8,000.
A company forgot to record accrued and unpaid employee wages of $350,000 at period-end. This oversight would a. Understate net income by $350,000. b. Overstate net income by $350,000. c. Have no effect on net income. d. Overstate assets by $350,000. e. Understate assets by $350,000.
b. Overstate net income by $350,000 Correct entry is Dr. Wages Expense, Cr. Wages Payable
The following information is available for a company before closing the accounts. After all of the closing entries are made, what made, what will be the balance in the Retained Earnings account? Total Revenues... $300,000 Retained Earnings... $100,000 Total Expenses... 195,000 Dividends..................... 45,000 a. $360,000 b. $250,000 c. $160,000 d. $150,000 e. $60,000
c. $160,000 $100,000 + $300,000 - $195,000 - $45,000
Prior to recording adjusting entries, the Supplies account has a $450 debit balance. A physical count of supplies shows $125 of unused supplies still available. The required adjusting entry is a. Debit Supplies $125; credit Supplies Expense $125 b. Debit Supplies $325; credit Supplies Expense $325 c. Debit Supplies Expense $325; credit Supplies Expense $325 d. Debit Supplies Expense $325; credit Supplies $125 e. Debit Supplies Expense $125; credit Supplies $125
c. Debit Supplies Expense $325; credit Supplies Expense $325 Supplies Used = $450 - $125 = $325