Chapter 3 The Accounting Cycle

Consider the following list of accounts: Supplies Expense Notes Payable Common Stock How many of the above accounts are temporary?

1- Supplies Expense

The closing entry for expenses includes:

A debit to Retained Earnings and a credit to all expense accounts.

The revenue recognition principle states that we record revenue in the period in which we collect cash.

False

A statement showing the change in the balance of common stock and retained earnings for the period.

Statement of Stockholders' Equity

A classified balance sheet shows subtotals for current ___________ and current ______________

Assets; Liabilities

A company receives cash from customers in May and performs services in June. The revenue is recorded in May.

Cash Basis Revenue

A company pays cash for supplies in May and uses those supplies in June. The expense is recorded in May.

Cash-Basis Expense

Book Value

Historical cost of an asset such as equipment, less the accumulated depreciation. Formula is (cost-accumulated depreciation)

At year-end, companies that utilize accrual-based accounting systems complete the measurement process through

Recording of adjusting entries

Depreciation is an allocation of the _____________ of buildings, vehicles, and equipment to expense over time as they are used.

cost

A classified balance sheet ______.

groups asset and liabilities into current and long-term categories

Assets, liabilities, and stockholders' equity.

permanent accounts

Matching Principle

recognize expenses in the same period as the revenues they help to generate

Permanent Accounts

the balance sheet accounts where the balances are carried forward from period to period.

If the controller for IBREAKUFIX does not record the adjusting journal entry to recognize revenue earned from the deferred revenue account, the balance sheet would be incorrect in which of the following ways?

1. Overstated= major category (assets) is higher than it should be because the adjusting journal entry was not recorded. 2. Understated= major category (liabilities) is lower than it should be because the adjusting journal entry was not recorded. Liabilities are overstated Stockholder's Equity is understated

A company purchases equipment for $7,500 on Jan 1, 20XX. The building has an expected useful life of 10 yrs and will be depreciated with the straight-line method 1/1/20XX: 12/31/20XX Adjusting Entry

1/1/20XX Equipment Debit $7,500 Cash Credit $7,500 Calculation for Depreciation Expense= Cost/Useful Life $7,500/10=$750 This is one year of depreciation Depreciation is a Contra Account with means it has a companion account and the companion here is going to be whatever the asset account is associated with and then it has an opposite normal balance which is why Accumulated Depreciation is credited. 12/31/20XX Depreciation Expense Debit $750 Accumulated Depreciation $750

A company receives $1,500 in advance on 6/1/20XX from a customer for services to be performed equally throughout the next year. Record the entries and post to the general ledger. 12/31/20XX Adjusting Entry for $1,000 in services provided

6/1/20XX Cash Debit $1,500 Deferred Revenue Credit $1,500 (Liability) 12/31/20XX Deferred Revenue Debit $1,000 Service Revenue Credit $1,000 Now we have an ending balance of deferred revenue of $500 in the account this tells us, that we still owe $500 worth of service.

The adjusting entry required when goods and services are provided to customer for amounts previously recorded as deferred revenues includes:

A debit to a liability

-basis accounting helps measure and report revenues and expenses in a way that clearly represents the net income of the company.

Accrual

The accounting basis that records revenues in the period that goods and services are provided to customers is referred to as

Accrual-Based Accounting

A company pays cash for supplies in May and uses those supplies in June. The expense is recorded in June.

Accrual-Basis Expense

A company receives cash from customers in May and performs services in June. The revenue is recorded in June.

Accrual-Basis Revenue

Record an expense in the current period that will be paid in cash in a future period.

Accrued Expenses

Record a revenue in the current period that will be collected in cash in a future period.

Accrued Revenue

The cumulative amount of depreciation expensed against a particular long-term asset, such as a vehicle is known as which of the following:

Accumulated Depreciation

A list of all accounts and their balances after adjusting entries have been prepared.

Adjusted Trial Balance

How do adjusting entries for accrued expenses affect liabilities and expenses?

Adjusting entries for accrued expenses can increase liabilities and increase expenses. (Accruals relate to entries that record revenues and expenses earned or incurred during the period prior to when the cash changes hands. Accrual adjustments include increasing assets and revenue or increasing expenses and liabilities.)

Which of the following statements describes the effect that adjusting entries may have on liabilities?

Adjusting entries increase liabilities for the amount of any accrued and unpaid expenses at the end of the period.

List all of the permanent accounts

Assets, Liabilities, Stockholders' Equity

A list of accounts showing total assets equal total liabilities plus total stockholders' equity.

Balance Sheet

The informal concept in accounting which states that expenses are recorded in the same period as the revenues they help to generate.

Cause and Effect

The distinction between current and long-term activities.

Classified

The entries that transfer the balances of all temporary accounts to retained earnings are referred to as

Closing Entries

Transfer of temporary balances to retained earnings.

Closing Entries

On 11/1, Ace Ventura Exterminating Service receives $24,000 in advance to provide exterminating services to a client over the next 6 months. What adjusting entry is recorded on 11/30 to recognize the revenue earned based on the services provided in November?

Debit Deferred Revenue Credit Service Revenue

At the end of the accounting period, after the financial statements have been prepared, what account is debited and what account is credited in the closing journal entry to close out the salary expense account?

Debit Retained Earnings Credit Salary Expense

Mel's Roofing Service owed employee salaries in the amount of $2,500 on 12/31 at the end of the accounting period, but this amount has not been paid yet. What account is debited and what account is credited in the adjusting journal entry required on 12/31 to recognize the salaries incurred?

Debit Salary Expense Credit Salary Payable

At the beginning of December, Global Corporation had $2,000 in supplies on hand. During the month, supplies purchased amounted to $3,000, but by the end of the month the supplies balance was only $800. What is the appropriate month-end adjusting entry?

Debit Supplies Expense $4,200, credit Supplies $4,200.

When a company records an adjusting entry for services previously recorded as Deferred Revenue, it records which two of the following?

Debit to Deferred Revenue Credit to Revenue

_______________ revenue arises when a business receives cash in one period, but does not provide all of the related goods or services until a later period.

Deferred (Revenue) (Liability)

Receive cash in the current period that will be recorded as a revenue in a future period.

Deferred Revenue

The process of allocating the cost of an asset to expense over the useful life of the asset is called

Depreciation

Closing Entries

Entries that transfer balances of all temporary accounts (revenues, expenses, and dividends) to the balance of the Retained Earnings account to prepare the company's books for the next period.

Jones Corporation provides services to a customer on June 17, but the customer does not pay for the services until August 12. According to the revenue recognition principle, Jones Corporation should record the revenue on August 12.

False

On 11/1, Violet's bagel shop purchased a building using a 24 month loan in the amount of $120,000 with an annual interest rate of 10%. Interest is due quarterly and principle is due upon maturity. As of 12/31, no interest had been paid. How much interest must be occurred as an adjusting entry before completing the financial statements?

Formula for calculating interest expense: Principal x Annual Rate x time (time in months #of months/12 $120,000 x 10% x 2/12= 2,000 Interest Expense Debit $2,000 Interest Payable Credit $2,000

The expense that relates to a formal note payable and accumulates or accrues throughout the accounting period is referred to as _________ expense.

Interest

The expense that relates to a formal note payable and accumulates or accrues throughout the accounting period is referred to as ____________ expense.

Interest

If an adjusting entry's debit is to an expense account, then the credit must be to which of the following?

Liability & Prepaid expense The credit is to a liability, not revenue, when the debit is to an expense. This type of adjusting entry records the expenses incurred during the period that have not been paid, i.e., are owed.

A customer purchased a drill press on November 14 on account from Sears. The drill press was delivered two weeks later. The customer paid for the drill press on December 5. When should Sears record the revenue for this transaction according to the revenue recognition principle?

November

How do temporary accounts differ from permanent accounts?

Only temporary accounts are cleared out at the end of the accounting period.

The information reported in the statement of cash flows is organized by these activities:

Operating, Financing, Investing

List of permanent accounts and their balances.

Post-Closing Trial Balance

Pay cash (or have an obligation to pay cash) in the current period that will be recorded as an expense in a future period.

Prepaid Expenses

A company pays $6,000 to cover the subsequent 12 months' rent on 6/1/XXXX. Record the entries and post to the general ledger. Prepare Adjusting entry 12/31/20XX

Prepaid Rent Debit $6,000 Rent Expense Credit $6,000 7 months went by, we are trying to figure out how much we are paying monthly in order to figure out the adjusting entry so we divide 6,000 by 12 to figure out the monthly rate for the year and then we multiply that 500 by 7 because 7 months went by from June to December and we want to calculate that $3500 as our entry. Rent Expense Debit $3,500 Prepaid Rent Credit $3,500 The new ending balance for prepaid rent would be 2,500 when you subtract the 5 months from the prepaid expense that we already used up. This follows the Matching Principle

What adjusting entries might be needed based on an adjusted trial balance?

Prepaid Rent, Supplies, Equipment, Deferred Revenue, Interest Payable, Service Revenue, Salaries Expense, Rent Expense and maybe Interest Expense

Revenue Recognition Principle

Record revenue in the period in which it's earned Revenue is recorded in the period in which goods and services are provided to customers.

Accrural basis accounting

Record revenue when we earn them and record expenses with related expenses regardless of when cash is received or paid.

When a company makes an end-of-period adjusting entry that includes a credit to Prepaid Rent, the debit is usually made to:

Rent Expense

Which of the following statements regarding the statement of cash flows are correct?

Reports cash disbursements Reports cash receipts The final financial statement that is typically prepared

Formal concept which states that sales of products or services are recorded in the period they are provided to customers.

Revenue Recognition Principle

List all of the temporary accounts

Revenues, Expenses, Dividends

On Wednesday 12/31/20XX, there are $1,200 in unpaid (but earned) wages that are owed to employees. Salaries are typically paid to employees on Fridays. Record the entries and post to the general ledger.

Salaries Expense Debit $1,200 Salaries Payable Credit $1,200 By recognizing this expense it will decrease our Net Income

On April 1, Katie Inc. collected $2,400 from a customer for a 12-month membership starting on that date. On December 31, Katie Inc. should credit:

Service revenue for $1,800 Katie already provided service for 9 months; $2,400 * 9/12

When a company makes an end-of-period adjusting entry, which includes a debit to Supplies Expense, the usual credit entry is made to:

Supplies

Closing entries move the balances from the ______ accounts into the Retained Earnings account.

Temporary

Depreciation Expense

The process of allocating the cost of an asset, such as equipment, to expense over the useful life of the asset. Major Category: Expense Financial Statement: Income Statement Normal Balance: Debit

According to the concept of expense recognition under accrual-basis accounting, if costs associated with producing revenue in the current year are not paid in cash until the following year, the costs should be expensed in the current year.

True

According to the revenue recognition principle, if a company provides services to a customer in the current year but does not collect cash until the following year, the company should report the revenue in the current year.

True

In an adjusting entry for expenses incurred but not yet paid ______.

a liability is increasing since cash will be paid in the future due to the expense incurred

Adjusted Trial Balance

a list of all accounts and their balances after the completion of adjusting entries, showing the total debits and credits.

Andy records an adjusting entry for deferred revenue. Andy should:

debit a liability account credit a revenue account

Revenues, expenses, and dividends.

temporary accounts

1/1/20XX bought supplies for $1,000 12/31/20XX ending balance of supplies = $500 Record and post the initial and adjusting entry

1/1/20XX Supplies Debit $1,000 Cash Credit $1,000 Formula for calculating supplies: Beginning+Additional-Ending = Expense 12/31/20XX Supplies Expense Debit $500 Supplies Credit $500

List of permanent and temporary accounts and their balances.

Adjusted Trial Balance

To complete the measurement process, companies need to update balances of assets, liabilities, revenues and expenses for changes created by ________________ entries.

Adjusting

On 1/1, Jeff's Unwhole Foods purchased equipment for $24,000 by signing a 10-year note payable. If Jeff's uses straight line depreciation to calculate depreciation expense and the equipment has a useful of 10 years, what account is debited and what account is credited in the adjusting journal entry required on 12/31 before the financial statements are prepared?

Debit Depreciation Expense for $2,400 Credit Accumulated Depreciation for $2,400

Which of the following is a possible adjusting entry?

Debit Salaries Expense, credit Salaries Payable.

A list of accounts showing total revenues minus total expenses equal net income.

Income Statement

is defined as the "cost of borrowing money."

Interest

Which of the following statements is correct regarding the adjusting entry to record interest accrued on a note payable?

Interest on the note payable is classified as an expense since it is a cost of borrowing.

Consider the following events for Betterment Incorporated: January 1 Betterment purchases gasoline for $200 on account.January 7 Betterment advertises lawn mowing services for $100 per lawn.January 9 Betterment signs up 8 customers who pay a total of $800 cash.January 12 Betterment mows the lawns of the 8 customers and all gasoline purchased on January 1 is used.January 13 Betterment pays for the gasoline purchased on January 1. Under accrual-basis accounting, what is the appropriate day to record the expenses related to the gasoline?

Jan 12

Which financial statement would report all of the following information: beginning balances for common stock and retained earnings; current period net income or loss; current period dividends; common stock issued during the year; ending balances of common stock and retained earnings? Retained earnings statement

Statement of Stockholders' Equity

Accumulated Depreciation

The cumulative amount of all depreciation expensed against a particular asset such as a vehicle. Category: Asset (Contra Account) Financial Statement: Balance Sheet Normal Balance: Credit

An adjusting entry for accrued expenses involves:

credit to a liability debit to an expense

A prepayment is originally recorded as an asset. An adjusting entry at the end of the accounting period results in a(n) ______ in the asset account and a(n) ______ in the expense account.

decrease; increase The asset value is decreasing as the benefit of the prepayment is being used. Consequently, the expense account is increasing by the value of the benefit used.

The statement of stockholders' equity includes these amounts:

dividends for the period net income ending balance retained earnings

If an adjusting entry's credit is to a liability account, then the debit must be to ______.

expense

The adjusting entry for a deferred revenue includes a debit to a(n) ______________ account and a credit to a(n) ___________ account.

liability; revenue

Costs of assets acquired in one period that will be recorded as expense in a future period are referred to as ______ and are initially recorded as _____.

prepaid expenses; assets

Cash Basis Accounting

record revenues at the time cash is received and expenses at the time cash is paid

The two major categories reported in the income statement are:

revenues and expenses

Temporary Accounts

revenues, expenses, and dividends are closed out at the end of each accounting period and transferred to Retained Earnings so that the new period begins with a zero (0) balance for these accounts.