Chapter 4

The adjusting entry to record the amortization of a long-term asset that lacks physical substance includes a _____ to _________ and a ________ to __________.

debit; amortization expense credit; accumulated amortization

What is a contra-account?

An account that is an offset or reduction of another account

Adjusting entries never affect the asset account called

cash

Temp accounts include

expenses, dividends, revenues

The deferral adjustment to record the amount of unearned service revenue that is now earned includes a ____.

-credit to service revenue -debit to unearned revenue

Financial states are prepared when? And Why?

After adjustments to ensure that all accounts have been brought to their correct balance

What does a contra-account keep?

It is used to keep track of all the depreciation recorded against an expense account (ie: equipment)

Adjustments ensure that assets report?

Their economic benefit remaining

A contra-account is?

a negative account. Carries the opposite balance of the account with which it is paired The use of a contra account allows a company to continue to report the original amount (or the gross amount) and to also report the carrying amount (or net amount).

In recording an accrual adjustment to account for revenues earned but not yet collected,

an asset is increased since cash will be collected at a later date

Which action will be taken in the adjusting entry to record rent expense that has expired during the month?

debit rent expense

The adjusting entry to record the amount of prepaid rent used during the period requires a ____ to rent expense and a _____ to prepaid rent

debit; credit

Adjusting entries are made at the ___ of the accounting period, while daily transactions are made throughout the accounting period

end

The ____ recognition principle requires an adjustment for income tax expenses owed attributable to the net income earned during the current period

expense

Amortization is the expensing of?

long-term assets that lack physical substance

Where is the balance sheet and statement of retained earnings numbers come from

the adjusted trial balance

The balance in retained earnings prior to the closing process equals

the balance at the end of the previous account period

Interest should be expensed in?

the same accounting period it is incurred

What is a good starting point for determining which accounts require adjustments?

unadjusted trial balance

T/F After the closing entries have been posted, the new balance in the retained earnings account will equal the retained earnings reported on the balance sheet

True amount on the bs was taken fr the statement of retained earnings. The statement of retained earnings had added net income and subtracted dividends to the beginning retained earnings balance. This calculation summarizes the effects of the closing entries on the retained earnings account

Adjusting journal entries never involves?

cash

The balance in the dividends account represents a reduction to stockholders' equity. therefore the dividends account has a normal___balance

debit

What is the adjusted trial balance?

A list of all accounts and their adjusted balances, which is used to check on the equality of recorded debits and credits

Examples of permanent accounts

retained earnings balance sheet accounts

Adjustments help to ensure that all revenues are recorded in the period in which they are ____

earned

Which of the following statements is correct regarding the adjustment 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

Closing entries move the balances from the ___ accounts into the retained earnings account

temporary

Depreciation expense is?

Income statement account

What is depreciation?

Process of allocating the cost of buildings, vehicles and equipment to the accounting periods in which they are used

Which of the following account balances will typically be reduced as a result of adjusting entries?

prepaid rent unearned revenue supplies

Adjusting journal entries always includes?

1 balance sheet, 1 income statement

Place the steps taken at the end of the accounting period to complete the financial statement preparation process in the correct order..

1. prepare adjusting entries 2. prepare the adjusted trial balance 3. prepare the financial statements

What is the contra-account called?

Accumulated Depreciation. (A negative asset account that is subtracted from the equipment account in the assets section of the balance sheet. )

For accrual adjustments, usually what are recorded for it requires an expense account?

Expense recorded with a debit and a liability is credited (increase)

Accumulated depreciation is a contra-account to a long-lived asset account, such as equipment. This means that it increases the balance of the long-lived asset on the balance sheet. T/F

False A contra account is a negative account. It carries the opposite balance of the account with which it is paired. Also, Accumulated Depreciation REDUCES the long-lived asset when portrayed on the balance sheet.

True False Adjustments ensure that assets on the balance sheet are reported at amounts that have been used up or expired during the period

False, Adjustments ensures that assets reports their economic benefit remaining, not the amount that has been used up or expired during the period

Which of the following transactions constitutes an accrual adjustment involving a revenue account?

Revenue earned, but not yet collected for interest on a not receivable. Why would wages incurred but yet paid to employees not correct? Bc/ it involves an expense account rather than revenue. Wages Expense would be increased instead.

The adjusting entry to record services earned but not yet billed requires

a debit to accounts receivable and a credit to service revenue

What are temporary accounts?

accounts that track financial results for a limited period of time by having their balances zeroed out at the end of each accounting year

What are permanent accounts?

accounts that track financial results from year to year by carrying their ending balances into the next year

Post-closing trial balance

an internal report prepared to check that debits equal credits and all temp accounts have been closed

Accumulated depreciation is recorded with a?

credit because it is the opposite of asset accounts which are usually credits

Adjustments are made to expense accounts at the end of the accounting period adhere to the ____ recognition (matching) principle

expense

Initially, a prepayment for items such as rent or insurance are recorded as assets and later are recorded as a(n)___ in the period the benefit expires.

expense

After the adjustments have been completed, the adjusted balance in income tax payable represents the amount ___ to the government at the end of the accounting period

owed

The closing entry for dividends involves a debit to __ and a credit to___

retained earnings; dividends

When is amortization not reported?

For long-term assets that have an unlimited period of usefulness. Ex: Company's logo will be useful indefinitely so it is not amortized.

Which of the following entries records the adjustment for income tax accrued, but not yet paid?

debit income tax expense credit income tax payable

Which of the following types of transactions could be an accrual adjustments?

increase to asset account and increase to revenue increase to liability account and increase to expense

Purpose of preparing an adjusted trial balance

to ensure that total debits equal total credits after the adjustments have been recorded

After adjustments have been completed, the adjusted balance in the interest expense account represents

total interest that has been paid or accrued during the period

As the balance in the accumulated depreciation increases, total assets ____ because accumulated depreciation is a ____-account

decrease; contra

Supplies should be____ and Supplies expense should be _____ for supplies used up during the period

decrease; increased

How to calculate income tax?

1.Start with the unadjusted revenue and expense numbers from the unadjusted trial balance 2.Adjust them 3.Then subtract like how to find net income/loss but do not include the income taxes!! 4.multiply by the tax rate

Identify the entries needed for the closing process

1.debit each revenue, credit each expense and record the difference in retained earnings 2.credit dividends and debit retained earnings

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

What are the 2 effects of deferral adjustments?

1. reduce the carrying value of assets on the balance sheet and 2. Transfer the amount of the reductions to related expense accounts on the income statement.

The 2 purpose of closing process

1. transfer net income or loss and dividends to retained earnings 2. establish zero balances in all income statement and dividend accounts

Accumulated depreciation is?

A balance sheet account

Adjustments are made at the ___ of the accounting period immediately before what?

Adjustments are made at the end of the accounting period immediately before preparing an adjusted trial balance and financial statement

What is the purpose of the depreciation adjustment for long-live assets?

Depreciation allows the company to allocate the cost of an asset over the years the asset benefits the company

Why is the balance in the depreciation expense account generally different form the balance in the accumulated depreciation account?

Depreciation expense only reflects the current period depreciation. Accumulated depreciation contains depreciation since the asset was purchased.

T/F The balance in the interest expense account and the balance in the interest payable account may be different after the adjustments are posted

T. Interest expense will contain an amount equal to all interest accrued during the accounting period. Interest payable will only contain amount of interest expense that has not been paid as of the end of the accounting period.

What is amortization?

The concept that applies to using up long-term assets that lack physical substance and have a limited period of usefulness. Ex: software app that is going to lose popularity over time At the end of every month, a deferral adjustment will report amortization as an expense in the Amortization Expense account. and accumulate it in a contra-asset account on the balance sheet (accumulated amortization)

What are the effects on the accounting equation from the adjustment for depreciation?

Total assets will decrease and total stockholders' equity will decrease

What is a good starting point for determining which accounts require adjustment?

Unadjusted trial balance

Depreciation is recorded for?

Use of equipment, buildings and software aka long-term assets

The expense recognition principle "matching" indicates that?

When an expense is used to generate revenues in the current period, part of its cost should be transferred to an expense account in that period. Process also refers to as depreciation.

Adjustments ensure that ____ balances are reported at amounts amounts representing the economic benefits that remain at the end of the period and will be used up in future periods.

asset

When is the closing process performed?

at the end of the year

The adjusted trial balance should be prepared ___ the financial statements are prepared to prove the ___ of the debits and credits

before; equality

The step in the accounting cycle where entries are recorded to update retained earnings and zero out temp account is referred to as

closing process

Accrual adjustments include either a__... OR ____...

debit; expense account / credit; liability OR debit; asset account/ credit; revenue account

Deferral adjustments includes: ___... OR ___

debit; liability account/ credit; revenue account OR debit; expense account/ credit to asset account

Balance sheet accounts, such as supplies or prepaid rent, ________ as a result of deferral adjustment

decrease

Unearned Revenue should be reduced and Revenue increased for the amount of revenue ____ during the period

earned

In the closing journal, the amount credited to retained earnings should ___

equal net income on the income statement

A closing entry may include a credit to?

expense

Interest incurred, but not yet paid during an accounting period should be recorded as an?

expense and liability

Which of the following statement is correct regarding dividends

have a normal balance closed into retained earnings by debiting retained earnings closed into retained earnings by crediting dividends

Which type of adjusting entry is recorded last because the amount is calculated after taking into account the effect on net income of all other adjustments recorded at the end of the period?

income tax incurred

The accrual adjustment recorded to adjust for expense incurred but not yet paid will cause

liabilities to increase

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.

post pone

Preparing a _______ trial balance is the last step in the accounting cycle

post-closing

The closing entry for the dividends involves a debit to retained earnings and a credit to dividends. The debit to retained earnings causes a ___ in the balance of the account

reduction

Expense recognition principle

requires an adjustment be made to report the cost of supplies used up this month as an expense ( to match revenues)

A closing entry includes a debit to?

revenue

net income or net loss is recorded in the retained earnings account when ___and ___ accounts are closed and transferred into retained earnings

revenue expense

Examples of temporary accounts

revenue, expenses, and dividends

The adjusting entry to record salaries and wages owed to employee at the end of the accounting period includes a debit to ______ and a credit to ______

salaries and wages expense salaries and wages payable

After the adjustments have been completed, the adjusted balance in the supplies expense account represents the cost of supplies____.

used during the accounting period

What is depreciation expense?

An account in the income statement- it reports the cost of expense [equipment] used in that current period [per the expense recognition principle]. On the balance sheet, we reduce the amount reported for equipment but don't take the amount of depreciation directly out of equipment account. Instead, we use a contra-account.

How does an increase in expense cause a decrease to stock holder's equity?

Because an increase in expense would make a decrease or impact on the net porfit.. in turn this affects stock holders equity... revenue-expense=net profit/loss Likewise, decrease in expense would make an increase in stock holder's equity bc it means more changes of net profit

What is the carrying value?

The amount at which an asset or liability is reported "carried" in the financial statements. Also known as net book value or book value

The adjusting entry to record the supplies used during the period will result in a

decrease to supplies and an increase to supplies expense