Chapter Four

The steps in the adjustment process

1. Analyze the accounts to determine the amount of the adjustment 2. Record the adjusting entry in the journal 3. Summarize the adjusting entries in the accounts

Steps taken at the end of the accounting period

1. Prepare the adjusting entries 2. Prepare an adjusted trial balance 3. Prepare the financial statements

How do accrual adjustments affect liabilities and expenses?

Accrual adjustments can increase liabilities and increase expenses.

The two accounts used to record the adjusting entry for the amortization of long term assets that lack physical substance?

Accumulated Amortization & Amortization Expense

When recording an adjustment for the use of equipment during the current accounting period, which two accounts are affected?

Accumulated Depreciation and Depreciation Expense

Which report is constructed immediately prior to preparing the financial statements with the purpose of demonstrating that the accounts balance?

Adjusted trial balance

____________ Expense should be recorded to recognize the use of and benefit received from long-lived assets, such as equipment, during the accounting period.

Depreciation

Sonic Gateway purchased $1,000 of app software that is estimated to have four years of usefulness. The adjusting entry to record the amortization includes a debit to _____ and a credit to _____.

Depreciation Expense; Accumulated Amortization

The adjusting entry to record depreciation, includes a debit to ______ ______ and a credit to ______ ________.

Depreciation Expense; Accumulated Depreciation

Adjusting Journal Entries

Entries necessary at the end of each accounting period to report revenues and expenses in the proper period and assets and liabilities at appropriate amounts.

The following would be increased because of recording a required accrual adjustment?

Interest Receivable Accounts Receivable Revenue

Which of the following transactions constitutes an accrual adjustment involving a revenue account?

Interest Revenue on a note receivable

Closing Process

Necessary end-of-period steps to prepare the accounts for recording the transactions of the next period.

Which line item on the adjusted trial balance reports its beginning balance but on the balance sheet reports its ending balance?

Retained Earnings

The closing entry for dividends involves a debit to _______ and a credit to _______.

Retained Earnings; Dividends

The following account balances will typically be reduced as a result of adjusting entries

Supplies Prepaid Rent Deferred Revenue

The following account balances will typically be reduced as a result of adjusting entries

Supplies Expense Interest Payable

How do the adjusting entry to record the supplies used during the period affect the financial statements?

Supplies on the balance sheet will decrease Net Income on the income statement will decrease Supplies Expense on the income statement will increase

carrying value

The amount at which an asset or liability is reported after deducting any contra-accounts.

The following is correct regarding a long-lived asset such as equipment

The original cost in the Equipment accounts will not change during the adjustment process

What is the purpose of preparing an adjusting trial balance?

To ensure that total debits equal total credits after the adjustments have been recorded.

unadjusted trial balance

a list of accounts and balances prepared before adjustments are recorded

adjusted trial balance

a list of accounts and their balances after all adjustments have been made

How can accrual adjustments for interest earned but not yet collected affect the balance sheet and the income statement?

accrual adjustments can increase assets and increase revenues

Closing journal entries are recorded ______.

after the financial statements have been prepared

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

contra account

an account that reduces a related account on a financial statement

Deferral Adjustments

an expense or revenue has been deferred if we have postponed reporting it on the income statement until a later period

Accural Adjustments

are needed when a 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

Supplies are recorded as a(n) ________ when purchased.

asset

When do companies adjust their accounts?

at the end of the accounting period

The adjusted trial balance should be prepared _______ the financial statements are prepared to prove the _______ of the debits and credits.

before; equality

The following adjusting entries will cause assets and stockholders' equity to increase? Adjusting for services provided

but not yet collected

Accrual adjustments are needed when a company has provided goods or services to customers or incurred an expense, but ______ has not been exchanged.

cash

A(n) ______ has a normal balance opposite of the account it offsets.

contra-account

The adjusting entry for supplies used during the period requires a _______ to Supplies and a _______ to Supplies expense.

credit; debit

The adjusting entry to record the amount of interest earned but not yet received on investments includes a _______.

debit to Interest Receivable credit to Interest Revenue

As the balance in the Accumulated Depreciation increases, total assets _____ because Accumulated Depreciation is a(n) _____ account.

decrease; contra

Deferral adjustments affect the balance sheet by _______.

decreasing assets for amounts used and liabilities for amounts of service/goods delivered to customers

After the adjustments have been completed for the fiscal year, the adjusted balance in the Depreciation Expense account represents the ______.

depreciation for the current fiscal year

Accrual adjustments include either a debit to a(n) ________ account and a credit to a liability account OR a debit to an asset account and a credit to a(n) _________.

expense; revenue

A contra account _______.

has a normal balance opposite of the account it offsets example is Accumulated Depreciation because it has a normal credit balance

The purpose of recording an adjusting entry for salaries and wages is to record wages ____.

incurred but not yet paid

Amortization

is the concept that applies to using up long term assets that lack physical substance and have a limited period of usefulness

The accrual adjustment recorded to adjust for expenses incurred but not yet paid will cause _________.

liabilities to increase

Interest incurred, but not yet paid during an accounting period, should be recorded as an expense and a(n) ________.

liability

Accumulated Depreciation has a normal _____ balance which indicates that it _____ Total Assets.

negative; decrease

If Cash is debited or credited in an entry, then one can conclude that it is ______.

not an adjusting entry

The carrying value of Supplies represents the cost of supplies ______.

on hand at the end of the accounting period

The adjusting entry for income taxes records income tax that is incurred and ______ by the company.

owed

Deferral adjustments include a debit to a liability account and a credit to a(n) ________ account OR a debit to a(n) __________ expense account and a credit to an asset account.

revenue; expense

Depreciation

the process of allocating the cost of an asset to expense over its useful life

To determine the adjusting entries required, a(n) ______ is prepared.

unadjusted trial balance

The adjusting trial balance _____.

will be used to determine the asset and liability balances on the balance sheet