Accounting Module 2
Analyzing the accounting equation at the end of the month will reveal:
revenues and expenses will change the equity account assets = liabilities + equity
The revenue recognition principle states that revenue:
should be recorded when goods or services are provided to customers at an amount expected to be received
The purpose of the closing process is to reset _______ account balances to zero and to transfer the changes in all of these accounts to the retained ________ account
temporary, earnings
Net Income
the difference between total revenue and total expenses when total revenue is greater
According to the revenue recognition principle, revenue is to be recognized when:
the product or service is provided
True or false: The revenue recognition principle states that revenue should be recorded in the period in which it is earned which may or may not be the period in which payment was actually received
true
Classified as a current asset
Cash Accounts receivable office supplies prepaid rent
Accounts that would be classified as current liabilities on a classified balance sheet
Accounts payable Notes payable (due in 3 months) Unearned rent Taxes payable
Balance column of the ledger
An abnormal balance is identified by writing it in red or setting it in brackets A zero balance for an account is usually shown by writing zeros or a dash in the balance column. Immediately after posting a transaction, the balance of the account is written in the Balance column
Which financial statement reports an organization's financial position at a single point in time?
Balance sheet
Accounts that would be classified as long-term liabilities on a classified balance sheet
Bonds payable (due in 5 years) Mortgage payable
Describe an unclassified balance sheet
Broadly groups accounts into assets, liabilities, and equity.
straight-line depreciation
(cost - salvage) / estimated useful life
Closing entries four-step process
1. Close income statement credit balances (transfer revenue accounts balances to income summary) 2. Close income statement debit balances (transfer expense accounts balances to income summary) 3. Close income summary account (transfer it's balance to the retained earnings account) 4. Close dividends account (transfer it's balance to the retained earnings account)
Order of categories on a classified balance sheet in the order that they would appear
1. Current assets 2. long-term investments 3. plant assets 4. intangible assets 5. current liabilities 6. long-term liabilities
Steps in the adjusting process
1. Determine what the current account balance is. 2. determine what the correct account balance should be. 3. record an adjusted entry.
List the steps in processing transactions in the correct order
1. Identify transactions and source documents 2. analyze transactions using the accounting equation (assets = liabilities + equity) 3. record journal entry 4. post entry to ledger
Steps of financial statement with adjusted trial balance
1. Prepare an unadjusted trial balance. 2. Journalize and post adjusting entries. 3. Prepare an adjusted trial balance 4. Prepare financial statements
Adjusted trial balance
The permanent account and their temporary account Temporary accounts: revenues expenses dividends income summary
What would appear in the equity section of a classified balance sheet?
retained earnings Common stock
Equity
Common stock Dividends
Examples of accounts that would be classified as current liabilities on a classified balance sheet
Accounts payable Notes payable (due in 3 months) Unearned rent Taxes payable
A classified balance sheet can be described as a balance sheet that:
organizes assets and liabilities into important subgroups. is more useful to decision makers. lists current assets in the order of how quickly they can be converted to cash.
A company made no adjusting entry for accrued and unpaid employee wages of $28,000 on december 31st. This oversight would:
overstate net income by $28,000
Accounting cycle 10 steps
1. analyze transactions 2. journalize 3. post 4. prepare unadjusted trial balance 5. adjust 6. prepare adjusted trial balance 7. prepare financial statements 8. close 9. prepare post-closing trial balance 10. reverse (optional
in its first year of operations, Grace Company reports the following: earned revenues of $60,000 ($52,000 cash received from customers); incurred expenses of $35,000 ($31,000 cash paid toward them); prepaid $8,000 cash for costs that will not be expensed until next year. Net income under the accrual basis of accounting is:
25,000
on april 1, a company paid the $1,350 premium on a three-year insurance policy with benefits beginning on that date. What amount of the insurance expense will be reported on the annual income statement for the first year ended december 31?
337.50
On may 25th, elegant lawns receives $9,600 cash for performing landscaping services
9,600 (assets account) = 9,600 (equity account)
T-account
A T-account will show the debit and credit effects of transactions may be used as a tool to visualize the effects of a transaction represents a ledger account and is a tool used to understand the effects of one or more transactions The left side of a T-account is called the debit side, and the right side is called the credit side. The left side is the normal balance side for assets, the right side is the normal balance side for liabilities and equity Assets (debit for increases, credit for decreases) = liabilities (debit for decreases, credit for increases) + equity (debit for decreases, credit for increases) Liability accounts will increase the right side. Asset accounts will increase the left side. A debit will increase in an asset account. A credit will increase in a liability account. A credit will always decrease an asset account A debit or a credit can increase an account, depending on what kind of account it is. crediting revenue, equity or liability on the right side of the accounting equation will increase it. A debit can increase an expense account
Income Statement
A financial statement showing the revenue and expenses for a fiscal period. examples: Utilities expense, wages expense, janitorial expense, advertising expense
balance sheet
A financial statement that reports assets, liabilities, and owner's equity on a specific date. examples: unearned subscriptions, unearned ticket revenue, utilities payable, wages payable, warehouse, accounts payable, accounts receivable, buildings
post-closing trial balance
A list of permanent accounts and their balances after a company has journalized and posted closing entries. (no temporary accounts)
A post-closing trial balance
A list of permanent accounts and their balances after closing
A temporary account
A temporary account has a balance for only one period. A temporary account is closed at the end of an accounting period.
Temporary account
A temporary account is closed at the end of an accounting period. A temporary account has a balance for only one period.
Importance of timeliness of periodic reporting
Businesses report financial information at regular intervals to ensure timeliness of data. Useful information must reach decision makers frequently and promptly. The value of information is often linked to its timeliness
Accounts that would appear on the post-closing trial balance
Cash - Included Dividends - Not included Depreciation Expense - Not included Retained Earnings - Included Income Summary - Not included
Define "current" as it applies to assets and liabilities on a classified balance sheet
Cash and other resources that are expected to be sold, collected, or used within one year or the company's operating cycle, whichever is longer.
Temporary accounts examples
Closed at period-end: Revenues Expenses Dividends Income Summary
on Jan. 2, Callie Company purchased $300 worth of supplies. She paid $100 immediately, but put the rest on account. The journal entry to record this transaction in Callie Company's books would include:
Credit Accounts payable for $200 Credit the Cash account for $100 Debit the supplies account for $300
The usual order for the asset subgroups of a classified balance sheet is:
Current assets, long-term investments, plant assets, intangible assets
What are current liabilities
Current liabilities are usually settled by paying out current assets such as cash. Current liabilities are obligations due to be paid within one year.
All of the required information to be entered in a journal
Date of transaction, explanation of transaction, debited and credited accounts, dollar amounts of debits and credits
Paul's Programming Services paid $200 dividends. Show how to use T-accounts to record this transaction
Debit Dividends; credit cash Reason: dividends are debited to the dividends account
on january 1, a company purchased a 5 year insurance policy for $1,800 with coverage starting immediately. if the purchase was recorded in the prepaid insurance, and the company records adjustments only at year-end, the adjusting entry at the end of the first year is:
Debit insurance expense, $360; credit prepaid insurance, $360
A business paid $40 in dividends. Show how to record the transaction to the T-accounts by completing the following sentence. Dividends would be ______ on the _____ side of the T-account. and Cash would be ______ on the _____ side of the T-account.
Debited, left, credited, right
Long-term liabilities
Debts of a business that are not due to be settled within one year
Posting Process
Entries are posted as soon as possible The posting process creates a link between the ledger and the journal The posting process does not require detailed explanations in the ledger Entries must be posted to the ledger before financial statements are prepared
Expense recognition (matching) principle
Expenses should be matched in the same accounting period as the revenues that are recognized as a result of those expenses. Matching of expenses with revenues is a major part of the adjusting process.
Normal Ending Balance examples
Fees Earned (Revenues) - Credit Office Supplies - Debit Dividends - Debit Wages Expense - Debit Accounts Receivable - Debit Accounts payable- Credit Interest Payable - Credit Prepaid Rent - Debit Wages Payable - Credit Building/land - Debit Common Stock - Credit
What is a source document?
Identify and and describe transactions/events entering the accounting system. Hard copy or electronic form. Examples: sales tickets, checks, purchase orders, utility bills, employee earnings records/payroll records, bank statements, invoice from supplier
Financial statements are typically prepared in the following order:
Income statement, statement of retained earnings, balance sheet
Equity in T account
Increases for stockholder investments (stock issuances) Increases for revenues Decreases for dividends Decreases for expenses common stock has a normal credit since it sits on right side of equation
A journal
It is a book of original entry that includes a chronological record of all transactions that have occurred within a business during a period occurred. A journal is a complete record of each transaction in one place and includes the debit and credit of each transaction Both the debit and credit side of the transaction can be seen
A general ledger
It is a collection of all accounts with their activity and balances that exist in a business
A trial balance
It is a list of each account and its balance at any given time and is used to verify that debits = credits
The process of recording transaction in a journal is called
Journalizing
Balance Sheet category examples
Land held for future expansion- long-term investment notes payable (due in 5 years) - long term liabilities accounts receivable - current assets trademarks - intangible assets accounts payable - current liabilities store equipment - plant assets wages payable - current liabilities cash - current assets Land used in operations - plant assets Franchises - intangible assets merchandise inventory - current assets land not currently used in operations - long-term investments trademarks - intangible assets machinery - plant assets
The formula to figure out the profit margin of a company is ________ divided by ________
Net income, net sales
Permanent Account examples
Not closed at period-end Assets Liabilities Common Stock Retained Earnings
Account examples that would be classified as a long-term investment
Notes receivable and investment stocks an bonds when they are expected to be held for more than the longer of one year or the operating cycle. Land held for further expansion is a long-term investment because it is not used in operations Other examples: notes receivable due in 2 years Investment in bonds Land held for future expansion
What defines a long-term investment?
Notes receivable and stock and bond investments are assets that are expected to be held for more than one year. Long-term investments are sometimes referred to as noncurrent investments
Liability
Payable in account title = always liability Unearned accounts are always liabilities (liability that will be worked off rather than paid off) normal credit balance because sit on the right side of the equation
A post-closing trial balance is a list of ______ accounts and their balances from the ______ (journal/ledger) ____________ (before/after) all ____________ (adjusting/closing) entries have been journalized and posted
Permanent, ledger, after, closing
Assets
Prepaid in an account title = ALWAYS an asset Receivable = always an asset Equipment land/property Office Supplies assets have normal debit balances as they sit on the left hand side of the equation.
Definition of a profit margin
Profit margin is also called return on sales. Profit margin is the ratio of a business's net income to its net sales. Profit margin is a useful measure of a business's operating results.
Statement of retained earnings
Reports the way that net income and the distribution of dividends affected the financial position of the company during the accounting period.
Examples of debit or credit DECREASES the normal balance
Service Fees Earned - Debit Service Revenue -Debit Store equipment - credit store supplies - credit supplies - credit supplies expense - credit taxes expense - credit taxes payable - debit trucks - credit unearned revenue - debit unearned subscriptions - debit unearned ticket revenue - debit
What is the difference between a balance column and a T-account?
T-accounts are a simple way to visualize the effect of a transaction; however, Balance column accounts are used in actual accounting systems
Accounting cycle definitions
The accounting cycle refers to steps followed by a company to prepare its financial statements. The cycle contains steps for adjusting and closing accounts. The accounting cycle is a series of steps repeated each reporting period. The accounting cycle contains 10 steps.
Adjusted trial balance and how it is used in preparing financial statements
The adjusted trial balance includes all accounts and balances appearing in financial statements. The ending retained earnings account balance on the balance sheet is transferred from the statement of retained earnings. Financial statements are easier to prepare using the adjusted trial balance than the general ledger. The income statement is the first financial statement prepared after preparing the adjusted trial balance.
What is the difference between an adjusted trial balance and an unadjusted trial balance?
The adjusted trial balance is a list of accounts and their balances after adjusting entries have been posted. The adjusted trial balance is used to prepare financial statements. The adjusted trial balance generally has more accounts listed than the unadjusted trial balance.
explain the difference between the unadjusted and the adjusted trial balance
The adjusted trial balance is prepared after adjusting entries have been recorded and posted The adjusted trial balance generally has more accounts listed than the unadjusted trial balance. The adjusted trial balance is used to prepare financial statements.
Importance of the closing process
The closing process resets the balances in temporary accounts to zero. The closing process helps to summarize a period's revenues and expenses
Describe the final step in the adjusting process
The final step is to create an adjusting journal entry to get from step 1 to step 2
Entering transactions in a journal
Total dollar amount of debits must equal the total dollar amounts of credits Credited accounts should be indented explanation is necessary to describe the transaction Leave one blank line between each completed journal entry
Posting
Transferring entries from the journal to the ledger
True or false: at the end of the period, the assets will still equal the liabilities plus equity
True
every adjusting entry includes:
a debit to an expense account OR a credit to a revenue account
Charts of accounts
a list of all ledger accounts used by a business along with a pre-assigned numbering scheme used to organize them. Numbering scheme example: asset account starting with 1, liability account start with 2...
An account
a record of increases and decreases in a specific asset, liability, equity, revenue, or expense item
_________ records revenues when services are provided, and records expenses when incurred.
accrual basis accounting
An adjusted trial balance includes which of the following accounts:
all accounts and their balances
Accrual basis accounting
an accounting system that uses the adjusting process to recognize revenues when earned and expenses when incurred. an accounting system which is consistent with generally accepted accounting principles. an accounting system that uses the matching principle to determine when to recognize revenues and expenses
Adjusting entry affects:
an income statement account a balance sheet account
financial reports covering a one-year period are known as _______
annual financial statements
When does the closing process take place?
at the end of an accounting period
Retained earnings
beginning retained earnings - net income - dividends paid
The difference between the cost of an asset and the accumulated depreciation for that asset is called
book value
_________ is the type of accounting that records revenues when cash is received, and records expenses when cash is paid.
cash basis accounting
an account linked with another account that as an opposite normal balance and is subtracted from the balance of the related account is a(n):
contra account
Assume that the accumulated depreciation account has an unadjusted normal balance of $120,000. The company's list of adjusting entries includes one that debits depreciation expense and credits the accumulated depreciation account for $20,000. The adjusted balance in the accumulated depreciation account is a:
credit balance of $140,000
The T-account for Accounts payable had 4 transactions entered into it. It was increased by $300 and by $100 and decreased by $50 and by $150, respectively. Its balance at the end of the period would be a (debit/credit) _____ balance of $ _______
credit, 200
The time period assumption assumes that an organization's activities may be divided into specific reporting time periods including all of the following except:
days (can report months, quarters, fiscal years, and calendar years)
The T-account for cash had 3 transactions entered into it. it was increased by $400 and decreased by $100 and by $30, respectively. Its balance at the end of the period would be a (debit/credit) _______ balance of $______
debit, $270
on Jan. 2, Callie Company performed $800 worth of services for a client. The client paid $100 immediately, but promised to pay the balance next month. The journal entry to record this transaction in Callie Company's books would include a _____ to the Cash account; a _____ to the Accounts receivable account and a _____ to the Service revenue account
debit, debit, credit
on Mar 3, Lyons Company paid dividends of $1,000. What should the journal entry include?
dividends would be debited and listed first. Cash would be credited and listed second.
The closing process takes place at the _____ of an accounting period, after the _______ trial balance is prepared and ______ the financial statements are posted
end, adjusted, before
The expense recognition (matching) principle aims to record ____ in the same accounting period as the _____ that are earned as a result of those costs. This principle is a major part of the _______ process
expenses, revenues, adjusting
A(n) _________ consists of any 12 consecutive months.
fiscal year
___________ reports on activities within the annual period such as one, three, or six months of activity
interim financial statements
The total amount of depreciation recorded against an asset over the entire time the asset has been owned:
is referred to as accumulated depreciation
which of the following assets is not depreciated
land (depreciated includes: store fixtures computers buildings equipment)
A posting reference in a _____ includes the page number of the account debited or credited in the _____ and serves as a link to cross-reference the transaction from one record to another
ledger, journal