Ch 3
4 types of adjusting entries
1. prepaid expenses 2. unearned revenue 3. accrued revenue/expenses
salaries payable
account used to record salaries owed to employees for work they did during the current period
interest expense
accumulates or accrues throughout the accounting period on notes payable when interest expense is accrued and adjusted at the end of the year, total liabilities increase and total stock holders equity decreases;
revenue recognition
adjustments to revenue accounts at the end of a pay period
longterm assets bare depreciation
allocation of the costs over their useful lives example: debit equipment, credit cash adj entry: debit depreciated expense, credit accumulated depreciation
deferred revenue, unearned revenue, a liability
amounts collected in advance of being earned
accrual adjustments
company has earned revenue or incurred an expense but no money has been exchanged yet can increase liabilities and increase expenses
expense account
cost incurred on borrowing money
accrued expense
happens before cash is paid example: utilities, they are used but not paid until the end of the month example: JE: debit salaries expense, credit cash ADJ entry: debit salaries expense, credit salaries payable JE: debit salaries payable and salaries expense, credit cash
prepaid expenses
paying in advance to create asset that lasts several months when adjusting, it reduces asset and records expense for amount used up examples: prepaid rent, prepaid insurance, longterm assets(supplies, equipment) when adjusting, expenses are always debited example: debit prepaid insurance, credit cash adj entry: debit insurance expense, credit prepaid insurance
unearned revenue
receiving cash in advance creating a liability example: debit cash, credit unearned revenue adj entry: debit unearned revenue, credit service revenue
accrual basis accounting
reporting revenues when they are earned and expenses when they are incurred increases liablities and expenses
matching principle
requires an adjustment for wages expense inccured during the accounting period that will be paid in a future accounting period
interest
the cost of borrowing
effects of revenue being earned but not yet collected
total assets increase, and total stock holders equity increases