Accounting chapter 4

last step of the accounting cycle is closing process at the end of the year after financial statements have been prepared

closing temporary accounts

Accrual adjustments

needed when company has earned revenue or incurred an expense in the current period but has not yet recorded it because the related cash will not be received or paid until a later period -used to record revenue or expenses when they occur prior to receiving or paying cash and to adjust corresponding balance sheets -each accrual adjustment involved one asset and one revenue account, or one liability and expense account *

adjustments needed to ensure:

-revenues are recorded when earned -expenses are recorded in same period as revenue they relate -assets are reported at amounts representing economic benefits that remain at the end of the current period -liabilities are reported at amounts owned at end of the current period that will require a future sacrifice of resources

why is an adjustment necessary for interest accrued on a note payable at the end of the period if the interest will not be paid until the note is due?

-the adjustment is needed to accurately portray the interest liability of the company, all amounts owed should be reported on the balance sheet -even though the interest will not be paid until a future period, the expense was actually incurred during the current accounting period

Deferral adjustments

-used to DECREASE balance sheet accounts and INCREASE corresponding income statement accounts -each deferral adjustment involves one asset and one expense or one liability and one revenue account *

important points for adjustments:

1. adjusting journal entries never involved cash 2. adjusting journal entries include 1 balance sheet and 1 income statement account

2 things all closing journal entries need:

1. debit each revenue account for the amount of its credit balance, credit each expense account for the amount of its debit balance, and record the difference in Retained Earnings. *the amount credited to Retained Earnings should equal Net Income on the Income statement 2. credit the dividends account for the amount of its debit balance and debit Retained earnings for the same amount

2 kinds of adjustments:

1. deferral adjustments (cash already received) 2. accrual adjustments (cash not yet received)

examples of accrual adjustments:

1. revenues earned but not yet recorded 2. wage expense incurred but not yet recorded 3. interest expenses incurred but not yet recorded 4. income taxes incurred but not yet recorded

examples of a deferral adjustment:

1. supplies used during a period 2. prepaid rent/insurance benefits expired during a period 3. depreciation recorded for use of equipment 4. amortization is recorded for use of software 5. gift cards (unearned revenue) is redeemed

closing process for temporary account's 2 purposes:

1. transfer net income/loss and dividends to retained earnings (a permanent account) 2. establish zero balances in all income statements and dividend accounts (temporary accounts)

why are Adjustments made at the end of accounting period:

1. update amounts already recorded in accounting records 2. include events that had occurred but not yet recorded

at the end of the accounting period, adjusting entries are required. place the steps in the adjustment process in the correct order:

1. use the unadjusted trial balance to determine the accounts requiring adjustment 2. record and post adjusting entries 3. prepare an adjusted trial balance to check the equality of debits and credits 4. prepare financial statements 5. record closing journal entries and post to the accounts 6. prepare are post-closing trial balance

adjusted trial balance

a list of all accounts and their adjusted balances, which is used to check on the equality of recorded debits and credits (do this before preparing financial statements)

which of the following types of transactions represent deferral adjustments that are recorded to adjust the amounts expired or used during the period?

decrease to prepaid insurance and increase to insurance expense; decrease to supplies and increase to supplies expense

adjustments help to ensure that all revenues are recorded in the period in which they are ______.

earned

Adjustments

entries made at the end of every accounting period to report revenues and expenses in the proper period and assets and liabilities at appropriate amounts; involved with both income statement and balance sheet accounts

true or false; a contra account, such as accumulated depreciation will have a normal account balance

false, while accumulated depreciation is listed in the asset section, it is a contra or negative asset. Therefor, it will have a normal credit balance since the true assets have a debit balance.

the accounts receivable account should be ____ when adjusting at the end of the period for any revenues that have been earned but not yet collected or recorded

increased

the adjusting entry to record interest owed on obligations at the end of the accounting period includes a debit to _____ and a credit to _______.

interest expense; interest payable

permanent accounts are found on

only the balance sheet

adjusted journal entries

record the effects of each period's adjustment in the debit equals credit format

the closing entry for dividends involved a debit to Retained Earnings and a credit to Dividends. the debit to retained earnings causes a ____ in the balance of the account

reduction

temporary accounts include ____, _____, and _____. these accounts only track the current period's results

revenues, expenses, dividends

which of the following statements is correct regarding the adjustment for salaries and wages accrued but not yet paid at the end of the accounting period?

salaries and wages expense will increase by the amount of the unpaid salaries and wages

the adjustment for supplies used during the period will result in a debit to the _____ account and a credit to the ____ account

supplies expense; supplies

taggert company paid $1800 for 6 month insurance premium on Sept. 1. Which of the following statements are correct regarding the accounting for this insurance over the six month period?

taggert will debit prepaid insurance for $1,800 on Sept. 1.; taggert will debit insurance expense for $300 on sept. 30 ; taggert will credit prepaid insurance for $300 on sept 30.

which of the following statements most accurately describes the purpose of the closing entries?

the establish zero balances into the income statement and divided accounts and and to transfer net income and dividends into the retained earnings

after the adjustments have been completed, the adjusted balance in the supplies expense account represents the cost of supplies _____.

used during the accounting period

temporary account

used to track only the current year's results and then closed before next year's activities are recorded; revenues, expenses, and dividends (income statement)

permanent account

when ending balance from one year becomes its beginning balance for the following year; statement of retained earnings

a prepayment that is originally recorded as an asset will be

allocated to future accounting periods based on the value of the benefit used during the period

post-closing trial balance:

an internal report prepared to check that debits equals credits and all temporary accounts have been closed

Steps of making required adjustments

analyze --> record --> summarize into accounts

when do companies make adjustments?

at end of the accounting period; daily adjustments would be too costly and time consuming

after posting the adjusting entry to record revenues earned but not yet collected, which account will be increased?

accounts receivable

which of the following statements describes the effect that adjustments may have on liabilities?

adjustments increase liabilities for the amount ot any accrued and unpaid expenses at the end of the period

after closing journal entries:

all temporary accounts should have zero balances, and the ending Retained Earnings balance is up to date and matches the balance sheet

if an asset account such as equipment has a normal debit balance, the associated contra-account should have a normal ____ balance.

credit

the adjusting entry to record depreciation on equipment includes a ____.

debit to depreciation expense; credit to accumulated depreciation

the entry to record income tax accrused, but unpaid, at the end of the accounting period includes both a _____ and a _____.

debit to income tax expense; credit to income tax payable