Accounting Chapter 3
what is a post closing trial balance
List of all permanent account balances after closing entries are journalized & posted Proves debits = credits for all accounts carried forward into the next period
describe accrued expenses
-Expenses incurred but not yet paid -Adjusting Entry is a debit to an expense account and a credit to a liability account
why is cash-basis accounting not GAAP approved? what does it make easy to manipulate?
-Net Income is easier to manipulate -Departure from GAAP because it violates the Revenue Recognition & Matching Principles
describe accrued revenues
-Revenues earned but not yet received in cash or recorded -Adjusting Entry results in a debit to an asset account and credit to a revenue account
what is a deferral
-a "prepayment" -Cash exchange happens before revenue/ expense is recognized
what does The revenue recognition principle do
determines when revenue is recorded and reported.
A company that forgets to recognize depreciation for the year understates its income and assets.
false
Accrued revenue is recognized when cash is received.
false
Three months before its year-end, a company signed a $250,000, 12%, 8-month note. Principal and interest will be paid at maturity. No interest should be accrued at year-end because the company has no obligation to pay the interest until the note matures.
false
deferred expenses will increase/decrease which accounts?
decrease asset, decrease S/E, increase expense
the adjusting entry for a deferral always __________ a balance sheet account and _______ an income statement account
decreases; increases
Adjusting Entries for accruals always _______ both a balance sheet and income statement account
increase
accrued revenue will increase/decrease which accounts?
increase asset, S/E, and revenue
accrued expenses will increase/decrease which accounts?
increase liability, decrease S/E, increase expense
post closing trial balance only contains
permanent accounts & their balances
to what account do we close temporary accounts to
retained earnigs
where do we transfer Net Income or Loss and Dividends to
retained earnings
what is Cash basis accounting
revenue is recorded when cash is received, regardless of when it is actually earned
Expense recognition (or matching) principle is
the process of identifying an expense with a particular time period; an expense is recorded when it is incurred, regardless of when cash is paid
accrual accounting requires that companies assign revenues and expenses to
the proper time period
what are temporary accounts
those related only to a given time period
when is revenue earned
through the delivery of goods or when a service is performed; not necessarily when a company receives cash (eventual collection of cash must be assured)
what 3 accounting assumptions or principles does accrual accounting entail
time-period assumption, revenue recognition principle, expense recognition principle
the purpose of adjustments is
to make sure revenues and expenses get recorded in the proper time period.
Adjusting entries must be made prior to the preparation of financial statements.
true
Every adjustment involves at least one income statement and one balance sheet account.
true
Income Statement accounts are closed to the income summary.
true
T/F: all adjusting entries will affect at least one income statement account and one balance sheet account
true
The Cash account is never part of an adjusting entry.
true
The expense recognition principle requires that expenses be recorded and reported in the same period as the revenue that it helped to generate.
true
When an expense is incurred prior to the payment of cash for that expense, an adjustment that increases an expense account and increases a liability
true
When revenue is earned after the earlier receipt of cash, an adjustment that increases a revenue account and decreases a liability account is recorded.
true
true/false: expense recognition principle should only include expenses that make a contribution to revenue during the period
true
describe deferred expenses
-prepaid -money is paid before the expense is recognize -we are deferring the recognition of the expense
cash basis accounting requires what of revenues and expenses
-requires revenue to be recorded when cash received -requires expenses to be recognized when cash paid
describe deferred revenues
-unearned -we receive money before the revenue is recognized
what is depreciation?
Process of allocating the cost of an asset to expense over its useful life
what is an accrual
Revenue/Expense recognized before money is exchanged
steps for closing entries
Step 1: Close revenues to Income Summary. Step 2: Close expenses to Income SummaryAt this point, the balance in the Income Summary should be equal to net income. Step 3: Close Income Summary to Retained Earnings. Step 4: Close Dividends to Retained Earnings.
accrual basis accounting requires what?
adjusting entries
what does the time-period assumption do
allows companies to artificially divide their operations into time periods so they can satisfy users' demands for information.
what is Accrual-basis accounting and why is it superior to cash basis accounting
alternative to cash-basis accounting that is required by generally accepted accounting principles. it links income measurement to selling, the principal activity of the company.
why must we make an adjusting entry for deferred expenses
because the initial cash payment did not result in an expense, but an asset that results in future benefits. (ex. prepaid rent increased asset and decreased cash, there was no expense recorded yet)
why must we make an adjusting entry for deferred revenues
because the initial cash received increased the cash account and decreased the unearned revenue account, so we must account for the fact that a service was performed in order to recognize the revenue
what account is NEVER affected by adjusting entries?
cash
deferred revenue will increase/decrease which accounts?
crease liability, increase S/E, increase revenue