Accounting

Equation for calculating depreciation - Straight line

- (Cost of asset - salvage value) / useful life - (original cost - salvage value) / useful life

Describe the steps in preparing the closing entries. What order do you close the entries in?

- 1. Close credit balances in revenue accounts to income summary. 2. Close debit balances in expense accounts to income summary. 3. Close income summary to capital account. 4. Close withdrawals to capital account.

What's Accrual accounting?

- Accounting system that recognizes revenues when earned and expenses when incurred.

Explain accrual accounting and how it improves financial statements?

- Accrual basis accounting uses the adjustment process to recognize revenues when earned and expenses when incurred. - Accrual accounting better reflects business performance. - Accrual accounting also increases the comparability of financial statements from one period to another.

Explain why temporary accounts are closed each period.

- Also called nominal accounts; is necessary to determine a periodic net income (or loss) and prepare books for the next period.

Define time period assumption.

- Assumption that an organization's activities can be divided into specific time period such as months, quarters, or years.

Define closing entries.

- Entries recorded at the end of each accounting period to transfer end-of-period balances in revenue, gain, experience, loss, and withdrawal accounts to the capital account.

What are the benefits of a spreadsheet (work sheet)?

- It aids in the preparation of financial statements - It reduces the possibility of errors when working with many accounts and adjustments. - It links accounts and adjustments to their impacts in financial statements. - It assists in planning and organizing an audit of financial statements - as it can be used to reflect any adjustments necessary. - It helps in preparing interim financial statements when the journalizing and posting of adjusting entries are postponed until year-end. - it shows the effects of proposed or "what if" transactions.

Define Adjusting entries.

- Journal entry at the end of the accounting period to bring an asset or liability account to its proper amount and update the related expense or revenue account.

Whats income statement?

- financial statement that subtracts expenses from revenues to yield a net income or loss over a specified period of time.

Define Adjusted trial balance.

- list of accounts and balances prepared after period-end adjustments are recorded and posted.

What's matching principle?

- prescribes expenses to be reported in the same period as the revenues that were earned as a result of the expenses.

Equation for calculating simple interest

- principal amount owed x annual interest rate x fraction of year since last payment date

Define Statement of owner's Equity.

- report of changes in equity over a period.

What's revenue recognition principle?

- the principle prescribing that revenue is recognized when earned.

Explain the importance of periodic reporting and the time period assumption?

- this allows the users to form an opinion regarding the company's financial position for the period and the profits it earned. - Time period assumption - presumes that an organization's activities can be divided into specific time periods known as accounting or reporting periods.

Identify the types of adjustments and their purpose.

--> 2 Adjustments -- Paid (or received) cash before expense (or revenue) recognized - Prepaid (Deferred) expenses - Unearned (Deferred) revenues - Also called deferrals because the recognition of an expense (or revenue) is deferred until after the related cash is paid (or received). --> Paid (or received) cash after expense (or revenue) recognized - Accrued Expenses - Accrued Revenues - Reflects transactions when cash is paid or received after a related expense or revenue is recognized.

Identify the steps in the accounting cycle.

1. Analyze transactions --> to prepare for journalizing 2. Journalize --> record accounts, including debits or credits --> Post --> Prepare unadjusted trial balance --> Adjust --> Prepare adjusted trial balance --> Prepare statements --> close --> Prepare post-closing trial balance --> Reverse (optional)

Explain the use of adjusting entries.

Adjusting journal entries are made to update the accounts and bring them to their correct balances.

What's depreciation?

Expense created by allocating the cost of plant and equipment to periods in which they are used.