Accounting Chapter 4
The steps in the Accounting Cycle
(1) Analyze transactions (2) Journalize transactions (3) Post to the ledger (4) Prepare an unadjusted trial balance (5) Journalize and post adjusting entries (6) Prepare an adjusted trial balance (7) Prepare financial statements (8) Journalize and post closing entries (9) Prepare a post-closing trial balance
What kind of an account is an Accrued Expense?
A liability
What kind of an account is a Deferred Revenue (Unearned Revenue) Account?
A liability. Goods or services are "owed" to the customer
Which accounting basis (cash or accrual) requires adjusting entries?
Accrual
What kind of an account is a Prepaid Expense?
An Asset. It is a future economic benefit.
Time Period Assumption
Artificial time periods used for reporting purposes to provide information to users of financial statements over a company's life
Unexpired costs are called ________
Assets
When are adjusting entries made?
At the end of the accounting period before financial statements are prepared
In an adjusting entry at least one _________ account and one __________ account are affected
Balance Sheet; Income Statement
Why is Historical Cost Principle used to measure the amount recognized in the financial statements for assets?
Because it is reliable and verifiable
Difference between Cash and Accrual Accounting
Cash Accounting: Revenues are recorded when cash is received for them. Expenses are recorded when cash is paid for them. Accrual Accounting: Revenues are recorded when realized or realizable and earned. Expenses are recorded when incurred (used or expired).
Deferred (prepaid) Expense
Cash paid before expense is incurred
Deferred Revenue
Cash received before revenue is earned
What is the formula for straight-line depreciation?
Cost - Residual Value/Estimated useful life OR depreciable cost/life
Accrued Liability (accrued expense)
Expense incurred before cash is paid
Expired costs are called ________
Expenses
Under Accrual Accounting, when are expenses recognized?
Expenses are recorded when incurred (used or expired) to generate revenues
Revenues
Inflows of assets or settlements of liabilities from delivering products or services
Which item on the Conceptual Framework gives the guidance as to when expenses should be recognized?
Matching Principle
Will the Net Income reported on the Income Statement and the Cash from Operating Activities on the Statement of Cash Flows be the same amount under Accrual Accounting?
No
Expense
Outflows of assets or incurrences of liabilities resulting from the delivery of products or services
Which item on the Conceptual Framework gives the guidance as to when revenue should be recognized?
Revenue Recognition Principle
Accrued Asset (accrued revenue)
Revenue earned before cash is received
Under Accrual Accounting, when is revenue recognized?
Revenues are recorded (recognized) when realized or realizable and earned
Ethical Pressures related to Accrual Accounting
The accountant's primary responsibility in preparing financial statements is to portray the affairs of the company accurately to the various outside users. The accountant may feel pressure from others within the organization to speed or delay recognition of certain adjustments.
Unit of measure used to record and report elements in the financial statements
The monetary unit
Why are adjusting entries made?
To bring all accounts up to date and ensure all transactions are recorded before the financial statements are prepared. OR Revenue recognition principle, matching principle, and Time period assumption OR to record all revenues earned and expenses incurred for the period.
Recognition
To record in the company's books
When would a company have Deferred Revenue (Unearned Revenue)?
When it has received cash from a customer before delivering goods or services to that customer
When would a company have Accrued Expenses?
When it has used an asset or service, but has not yet recorded it or paid for it
When would a company have Accounts Receivable?
When it makes a sale or provides services "on account". The customer will be billed and the company will receive payment from the customer in the future.
When would a company have Prepaid Expenses?
When it pays for goods or services before using them
Will the Net Income reported on the Income Statement and the Cash from Operating Activities on the Statement of Cash Flows be the same amount under Cash Accounting?
Yes