accounting chap 3

Accrual accounting

the process of recognizing revenues when earned and expenses when incurred regardless of when cash is exchanged

adjusting entries

to ensure both the balance sheet and the income statement more accurately represent financial information Adjusting entries help satisfy the matching principle.

unadjusted trial balance vs adjusted trial balance

unadjusted trial balance reports account balances before adjusting entries have been recorded and posted. An adjusted trial balance reports account balances after adjusting entries have been recorded and posted.

5 types of adjusting entries

1. Adjust prepaid assets; 2. Adjust unearned liabilities; 3. Adjust plant and equipment assets; 4. Adjust accrued revenues; and 5. Adjust accrued expenses

mixed account

An asset or liability account requiring adjustment at the end of an accounting period is referred to as a mixed account because it includes both a balance sheet portion and an income statement portion. The income statement portion must be removed from the balance sheet account by an adjusting entry.

permanent accounts

Balance sheet accounts such as Cash and Retained Earnings, are permanent accounts they have a continuing balance from one fiscal year to the next.

Closing entries

Closing entries transfer each revenue and expense account balance, as well as any balance in the Dividend account, into retained earnings.

COST OUTLAYS

Recorded as ASSETS when costs are incurred to produce revenue in future accounting periods, for example: prepaid rent. Recorded as EXPENSES when costs are incurred to earn revenue in the present accounting period, for example: rent expense.

temporary accounts

Revenues, expenses, and dividends are therefore referred to as temporary accounts their balances are zeroed at the end of each accounting period.

The complete accounting cycle consists of eight steps:

Steps occurring continually during the fiscal year: ----------------------------------------- Step 1: Transactions are analyzed and recorded in the general journal. Step 2: The journal entries in the general journal are posted to accounts in the general ledger. --------------------------------------- Steps occurring whenever interim or year‐end financial statements are prepared at the end of an accounting period ----------------------------------------- Step 3: An unadjusted trial balance is prepared to ensure total debits equal total credits. Step 4: The unadjusted account balances are analyzed and adjusting entries are journalized in the general journal and posted to the general ledger. Step 5: An adjusted trial balance is prepared to prove the equality of debits and credits. Step 6: The adjusted trial balance is used to prepare financial statements. ---------------------------------------- Steps occurring only at the fiscal year‐end ----------------------------------------- Step 7: Closing entries are journalized and posted. Step 8: A post‐closing trial balance is prepared.

depreciation

The process of allocating the cost of a long‐lived asset over the period of time it is expected to be used

5 types of adjusting entries

expenses prepaid expenses - To adjust prepaid expense for the amount of benefit used Account receivable revenue -to record revenue earned on credit Deprecation Expense accumulated depreciation -to allocate the costs of plant and equipment over their useful lives Unearned Revenue revenue -to adjust unearned amounts now earned Expense payable -to adjust for accrued expenses

An accrued expense

is an expense that has been incurred but has not yet been paid or recorded.

Accrued Revenues

is income that has been earned but has not yet been collected or recorded.

A post‐closing trial balance

is prepared immediately following the posting of closing entries. The purpose is to ensure that the debits and credits in the general ledger are equal and that all temporary accounts have been closed.

The matching principle

requires that expenses be reported in the same period as the revenues they helped generate. expenses are reported on the income statement: a) when related revenue is recognized, or b) during the appropriate time period, regardless of when cash is paid.