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