ACCT 2010 Chapter 4
accrued
(of a benefit or sum of money) received or accumulated in regular or increasing amounts over time.
after the adjustments have been completed the adjusted balance in the interst expense account represents
total interest that has been paid and/or accrued during the period
Sterling Company paid $1200 for 3 months of rent on April 1 of the current year. On April 30 Sterling Company made an adjusting entry to account for the rent that expired during the month of April. The adjusting entry included a debit to Rent Expense in the amount of __________ and a credit to Prepaid Rent in the amount of ____________. The remaining balance on Prepaid Rent account after the adjustments is____________.
- 400 (the rent used during April is 1200/3 months - 400 (the asset account is reduced by one months rent which equals 1200/3 months - 800 (the rent used during April is 1200/3 months leaving only 2 months of unexpired rent in the asset account
a gift card
- An increase to the account called cash (asset) and an increase to account called deferred revenue, a liability
order of adjustment process
1. Analyze the accounts to determine the amount of the adjustment 2. Record the adjusting entry in the journal 3. Summarize the adjusting entries in the accounts
The adjusting entry to record the supplies used during the period will result in a(n)
Decrease to supplies and increase to supplies expense
depreciation
a reduction in the value of an asset with the passage of time, due in particular to wear and tear.
_____ adjustments involve adjusting entries where goods/services have been provided to customer or the expense has been incurred, and cash will be collected or paid in the future
accrual
How can accrual adjustments for interest earned but not yet collected affect the balance sheet and the income statement?
accrual adjustments can increase assets and increase revenue
a prepayment that is originally recorded as an asset will be ______
allocated to future accounting periods based on the value of the benefit used during the period
amortization
an accounting technique used to periodically lower the book value of a loan or intangible asset over a set period of time
the adjusted trial balance must be prepared _____ the financial statements are prepared to prove the _____ of the debits and credits
before; equality
If an asset account such as equipment has a normal debit balance, the associaled contra-account should have a normal _______ balance
credit
the closing entry to close rent expense requires rent expense to be ___and retained earnings to be ___
credited; debited
the adjusting entry to record the revenue earned by selling fulfilling its obligation results in _____ to the deferred revenue account
debit
the adjusting entry to record revenue for the services for which the seller has performed its obligation but has not yet been billed the customer requires ______
debit AR credit sales rev
The entry to record the payment of wages incurred in the prior accounting period is recorded with ____.
debit SW payable credit cash
Which of the following entries records the adjustment for income tax accrued, but not yet paid?
debit income tax expense and credit income tax payable
Describe the purpose of a closing entry
establish zero balances in the income statement and dividend accounts to transfer net income and div into retainings
when should supplies be recorded as an expense?
in the period the supplies are used, regardless of when they were purchased
What are the effects on the accounting equation from the adjustment for salaries and wages incurred, but not paid yet?
increase L decrease SE
when making deferreal adjustments to record the amount used during the period for items such as prepaid insurance or supplies the debit will
increase; expense
the equipment account balance in a companies ledger equals its
original cost
Adjustments ensure that liabilities are reported as all amounts ____ at the end of the accounting period
owed
The adjusting entry for income tax record income tax that is incurred and _____ by the company
owed
salaries and wages payable is recorded for salaries and wages incurred but not yet
paid
In accrual accounting, to defer means to ____ recording the other side of the cash transaction as a revenue or expense. Instead the other side of the cash entry is recorded as liability or prepaid.
postpone
the closing entry for dividends involves a debit to retained earnings and a credit to dividends the debit to retained earnings causes an _____ in the balance of the account
reduction
Expense Recognition Principle
requires that a portion of long-lived assets be transferred to an expense account during the accounting period the asset is being used to generate revenues.
Generally accepted accounting principles require adjusting entires to be recorded at the end of an accounting period to ensure compliance with
revenue and expense recognition principle
net income (or loss) is recorded in the retained earnings account when _____ and _____ accounts are closed and transferred into retained earnings
revenue; expense
what are the effects on the financial condition of the business from the adjusting revenues from the seller fulfilling its obligations that have not yet been collected
total assets will increase and total SE will increase
book value
what equipment is worth on books (equipment - acc. depreciation)
adjusting entries are recorded:
- At the end of the accounting period, prior to the preparation of financial statements
deferral adjustments affect the balance sheet by
- Decreasing assets for amounts used and liabilities for amounts of serives/goods delivered to customers
The expense recognition principle
- Requires an adjustment for income tax expenses owed attributed to the net income earned during the current period
the adjusting entry to record depreciation includes
- debit to depreciation expense - credit to accumulated depreciation
why is an adjustment necessary for interest accrued on a NP at the end of the period is the enters will not be paid until the note is due?
- the adjustment is needed to accurately portray the interest liability of the company, all amounts owed should be reported on the balance sheet - Even though the interest will not be paid until a future period, the expense was actually incurred during the current accounting period
Which of the following may require an accrual adjusting entry that is recorded with a debit to an expense and a credit to a liability?
- utilities to be paid in later accounting period - interest owed on notes payable
Which of the following types of transactions represent accrual adjustments?(select all that apply.)
- Increase to Income Taxes Payable and Increase to Income Taxes Expense - Increase to Interest Payable and Increase t Interest Expense
After all closing process, which accounts will have zero balances
- Revenues - Expenses - Dividends - All temporary accounts
why is it necessary to make adjustments to revenue accounts at the end of the accounting period
- Revenues the seller has performed of its obligation but not yet billed to AR should be recorded as a revenue - Deferred revenue should be reduced for any portion the seller has fulfilled of its obligations during the current period
Financial statement items
- Supplies expense: amount used and reported on the income statement - Supplies: amount remaining and reported on the balance sheet - Accounts payable: amount owed for supplies purchased on account
True or false: the balance in the interest expense account and the balance in the interest payable account may be different after the ajustments are posted
- True: interest expense will contain an amount equal to all interest accrued during the accounting period - interest payable will only contain the amount of interest expense that has not been paid as of the end of the accounting period
the adjusting entry to record amortization of a long-term asset that lacks physical substance includes
- debit to amortization expense -credit to accumulate amortization
the deferral adjustment to record the amount of service revenue collected in advance for which the company has now satisfied the performance obligation includes a
- debit to deferred revenue - credit to service revenue
The adjusting entry to record salaries and wages owed to employees at the end of the accounting period includes
- debit to salaries and wages expense - credit to SW payable
Which of the following account balances will typically be increased as a result of adjusting entries
- supplies expense - interest payable
As of December 31, ABC company has a profit before tax of $12,000. The company's tax rate is 25%. The adjustment will include a(n)_______ of $ _______ to income tax payable
Debit; $3000
The annual depreciation taken on a vehicle totals $3000. The vehicle has been in service for 3 whole years and the adjusting entries have been completed for the year. at the end of the 3rd year the financial statements will report depreciation expense of __________ and Accumulated Depreciation of ___________.
- 3000 (the expense reflects just the current years use. The past two ears depreciation has been closed into retained earnings - 9000 (accumulated depreciation reflects all the depreciation on the vehicles since they have been in service which equals 3000x3yrs
steps in the adjustment process in order
- Use the unadjusted trial balance to determine the accounts requiring adjustment - record and post adjusting entries - prepare an adjusted trial balance to check the equality of the debits and credits - prepare financial statements - record closing journal entries and post to the accounts - prepare a post-closing trial balance
As of Dec. 31, $2500 of interest expense has accrued on a $50,000 note Payable. The note Payable and the incurred interest will become due and Payable next year. How will the interest affect the adjustments at the end of the year?
interstate's expense should be increased because the cost in interest related to the current period