Accoutning chapter 4

Step 6:

Adjusted Trial Balance

_______ ensure that revenue and expenses recognition criteria are properly applied and make it possible to produce up to date and relevant financial info

Adjusting entries

Interim periods-

monthly or quarterly periods

-because revenue expenses and dividends declared relate to activities over a particular accounting period the are considered________ in other words these accounts are used temporarily to record activity for one accounting period and their balances are not carried forward

temporary accounts

Step 8: closing entries -closing entries are used

to transfer the balances in the revenue, expense, and dividends declared accounts to the retained earnings account, thereby updating that account to its end of period balance

The _______ usually referred to as unadjusted trial balance which means it was prepared before adjusting entries have been made

trial balance is

quipment is a contra asset account this means it is offset against an asset account, - the reason for using separate contra asset accounts instead of crediting equipment directly for depreciation is

using a contra asset account enables companies to disclose both the original cost of the equipment and the total estimated cost that has been expensed to date

list characteristics of Accrued Revenues

-revenues that have been earned but not yet recorded through journal entries -example legal services -adjusting entry for accrued revenues is required for 2 reasons To show the receivable that exists at the end of the period To record the revenue that has been earned during the period

Step 9: Post Closing Trial balance

-third and last trial balance is the post closing trial balance -it lists all permanent accounts and their balances after closing entries are journalized and posted -purpose of this is to prove the equality of the permanent account balances that are carried forward into the next accounting period

5 step process to measure and report revenue under IFRS

1) identify the contract with the client or customer 2)Identify the performance obligations in the contract 3)Determine the transaction price 4)Allocate the transaction price to the performance obligations in the contract 5)Recognize revenue when (or as) the company satisfies the performance obligations In a service company revenue is recognized at the time the service is performed In a merchandising company revenue is recorded when the merchandise is sold and delivered

Adjusting entries are important because the trial balance may not have up to date info for several reasons

1) some events are not recorded daily because it is not efficient or practical and are instead reported monthly, quarterly etc ex salaries 2) some costs are not recorded during the accounting period because these costs expire with the passage of time rather than as a result of recurring daily transactions ex rent 3) some items may be unrecorded because their amounts were unknown, ex utility service bill

Adjusting entries are made for 2 purposes

1) to record the expense applicable to the current accounting period 2) record the offsetting reduction to the related asset (prepaid expenses)

- 4 closing entries necessary to close the temporary accounts

1)Close all revenue accounts to income summary 1)Close all expense accounts to income summary 1)Close income summary to retained earnings 1)Close dividends declared to retained earnings

Accruals- 2 subcategories

Accrued expenses ( expenses incurred but not yet paid in cash or recorded through transaction journal entries Accrued revenues ( revenues earned but not yet received in cash or recorded through transaction journal entries)

list characterisitic of prepaid expenses

Expire with the passage of time Record the expired costs of prepaid expenses whenever financial statements are prepared

accrual basis accounting

means that transactions affecting a company's financial statements are recorded in the periods in which the events occur rather than when the company actually receives or pays cash

-all statement of financial position accounts are considered _____

permanent accounts

Adjusting entries are classified as ______ or ______

prepayments accruals

n the statement of financial position accumulated depreciation, equipment is deducted from the real asset account as follows, Equipment- Less Accumulated Depreciation=Carrying amount -difference between the cost of a depreciable asset and its related accumulated depreciation is ______

referred to as the carrying amount(net book value)

adjusting trial balance

shows the balances of all accounts, including those that have been adjusted at the end of the accounting period

Step 5 in accounting cycle: journalize and post adjusting entries; prepayments/accruals

journalize and post adjusting entries; prepayments/accruals

Salaires adjustment entry eliminates the _______

liability for salaries payable that was recorded

revenue recognition is sometimes known as ______

matching (expenses is matched with the results (revenue)

Financial statements are prepared in the following order

Income statement is prepared first using the revenue and expense accounts Statement of changes in equity is prepared using the common shares retained earnings and dividends declared accounts, and the net income or loss reported in the income statement Statement of financial position is the thirds statement prepared using the asset liability and SE accounts.NOTE SE of financial positions includes the ending common shares and ending retained earnings account balance as reported in the statement of changes in equity

-the amount of interest incurred is determined by 3 factors

The principal amount or face value of the loan The interest rate The length of time that the loan is outstanding

Fiscal year-

accounting period of 1 year

ASPE revenue can be recognized when

Performance of an obligation is substantially complete Revenue can be reliably measured Collection is reasonably certain (debit AR, credit revenue)

Prepayments - has 2 sub categories

Prepaid expenses ( expenses paid in cash and recorded as assets before they are used) Unearned revenues ( cash received and recorded as liabilities before revenue is earned)

list characteristics of Accrued Expenses

These are expenses that have been incurred but not yet paid or recorded through transaction journal entire. Ex interests, salaries Because accrued expenses are not recorded by a transaction journal entry an adjusting entry is required for 2 purposes 1) to record the obligations that exist at the end of the period 2) to recognize the expenses that apply to the current accounting period

Adjusting entries for prepaid expenses result

in an increase ( a debit) to an expense account and a decrease ( a credit) to an asset account

revenue is normally the term for

income that results from a company's ordinary activities such as the provisions of services in a service company or the sale of merchandise (goods) in a merchandising company.

expense recognition

is linked to revenue recognitions in that expenses are recognized -expenses are recognized when Due to ordinary activity, a decrease in future economic benefits occur A decrease in an asset or ann increase in a liability Can be measured reliably

important point about depreciation: depreciation is an __________That is we depreciate an asset to allocate its cost to the periods over which we use it

allocation concept, not a valuation concept.

-Until prepaid expenses are adjusted at the end of each accounting period_______are overstated and ____ are understated. If expenses are understated than net income, retained earnings, and shareholders equity will be overstated

assets, expenses

-the period of service for long lived assets is_____

called useful life

mportant to understand that adjusting entries NEVER involve the_____

cash account

under revenue is recorded only when cash is received and an expense is recorded only when cash is paid

cash basis accounting

______ is the process of allocating the cost of a long lived or non current asset such as buildings and equipment to expense over its useful life

depreciation

An adjusting entry for prepaid expenses is required to recognize the

expense and reduction of the asset

the term ______ is usually used for activities that are not part of the company's ordinary activities like the sale of land

gains