Accounting Exam 2 Chapter 4

Order of steps in accounting cycle

Analyze, Record, Summarize in T-accounts, Prepare trial balance, Report financial statments

On Dec. 5, sell $500 gift card. By Dec. 31, card has been redeemed.

Debit cash 500 Credit deferred revenue 500

Which action will be taken in the adjusting entry to record rent expense that has expired during the month?

Debit rent expense

Closing entries to close revenue & expense accounts:

Debit revenues Credit expenses Record difference in RE If done right, amount credit to RE should equal net income on income statement

Account balances that will be reduced as a result of adjusting entries?

Deferred revenue, supplies, prepaid rent

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

liabilities to increase

3 months of rent were prepaid on sept. 1 for $7,200 but 1 month now has expired, leaving only 2 months prepaid at sept. 30

debit rent expense 4,200 credit prepaid rent 4,200

Of the $600 in supplies previously received, $250 remain on hand at Sept. 30

debit supplies expense 350 credit supplies 350

Balance sheet accounts, such as supplies or prepaid rent, ___ as a result of deferral adjustments

decrease

Deferred revenue is what type of adjusting entry?

deferral

When making deferral adjustments to record the amount used during the period for items such as prepaid insurance or supplies, the debit will _____ an ____ account

increase, expense

Accrued expenses

incur expense in current period to be paid for later

_____ defined as "cost of borrowing money". Since account represents a cost incurred on borrowed money, it's classified as an _____ account under stockholder's equity

interest, expense

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

owed

Depreciation

the allocation of the cost of a long term assets to expense over its useful life

Adjusting entry for depreciation

debit depreciation expense, credit accumulated depreciation (which is a contra-asset)

Purpose of closing entries

-Transfer net income (or loss) and dividends to Retained Earnings. -Establish zero balances in all income statement and dividend accounts.

On Jan. 1 co. purchases a $20,000 truck. The truck has an estimated useful life of 5 years and is depreciated $4,000 per year

debit equipment 20,000 credit cash 20,000

Deferrals

Cash happens first, adjusting entry updating revenue or expense happens later, include same accounts as adjusting

If a company records a debit to salaries and wages payable and a credit to cash, what was occurred?

Company is paying for salaries and wages that had been accrued earlier

Closing entries to close dividends:

Credit dividends account for amount of it's debit balance & debit RE for same amount

Temporary accounts

Used to track only the current year's results and then are closed before the next year's activities are recorded. ex. revenues, expenses, dividends

Why are adjustments needed at the end of accounting period?

ensure all assets & liabilities are reported at appropriate amounts

what are adjustments?

ensure that the income statement includes all revenues and expenses of that period and that balance sheet amounts are updated

Adjusting entries will NEVER include

cash

entries needed for the closing process

credit expenses debit revenues record diff. in RE

The deferral adjustment to record the amount of service revenue collected in advance for which the company has now satisfied the performance obligation includes

credit to service revenue debit to deferred revenue

For companies that generate a net loss during the current period, the closing entries will result in a net ____ entry to RE

debit

The adjusting entry to record revenue for services which seller has performed its obligation but has not yet been billed the customer requires

debit A/R credit service revenue

Adjusting entry for gift card

debit deferred revenue 500 credit service revenue 500

Adjusting entry for truck

debit depreciation expense 4,000 credit accumulated depreciation 4,000

Accrued revenue

earn revenue in current period but will receive cash later

Balance sheet on truck

equip. 20,000 less: acc. depr. (4,000) book value: 16,000

Deferred revenue

receiving cash in advance from customers creates a liability

At the end of the accounting period, adjusting entries are required. Order is:

-Use unadjusted trial balance to determine accounts required adjustment -record and post adjusting entries -prepare adjusted trial balance to check equality of debits and credits -prepare financial statements -record closing journal entries and post to accounts -prepare post-closing trial balance

Whats the effect of Dec. 31 adjusting entry to record $400 of revenue for which the seller has performed for customers but not yet collected?

A/R increased by $400 Sales revenue increased by $400

2 accounts are used to record adjusting entry for amortization of long-term assets that lack physical substance?

Accumulated amortization & amortization expense

At the end of sept. $3000 in salaries expense has been incurred that won't be paid until October

Adjusting entry: Credit salary expense 3,000 Debit salaries payable 3,000

On Dec. 1, start audit that will take 3 months, co. will get paid $100,000 when the job is completed. At the end of December, 20% of the work is complete.

Adjusting entry: credit A/R 20,000 debit service revenue 20,000

What type of transaction represents accrual adjustments?

Increase to income taxes payable & increase to income taxes expense

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

Interest revenue on a note receivable

Accrual Adjustments

Revenue or expense happens first, cash will be received or paid later

The accrual adjustment recorded to adjust for revenues not yet collected will cause

assets to increase

The adjusting entry to record interest owed on obligations at the end of the accounting period includes:

a debit to interest expense a credit to interest payable

Permanent accounts

balance sheet accounts whose balances are carried forward to the next accounting period ex. Retained Earnings

The A/R account should be ___ when adjusting at the end of the period for any revenues from fulfilling obligations to buyers which has not yet been collected or recorded

increased

Accrued expenses(wages, interest, income tax)

incur expenses in current period to be paid for later

After adjustments have been completed, the adjusted balance in "salaries and wages payable" account represents wages incurred, but not yet ____by the company

paid

EVERY adjusting entry will include

revenues or expenses (income statement) or asset and liability (balance sheet)

Adjusting entries are necessary whenever we have...

revenues or expenses that cover multiple accounting periods