Chapter 4 Accounting

accruals and deferrals

Adjusting entries fall into two categories:

adjusting entries

needed to ensure that the revenue recognition and matching principles are followed

principlexratextime=

interest rate

time period assumption

economic life of business can be divided into artificial time periods

accrued expenses

expenses incurred but not yet paid in cash or recorded

matching principle

expenses matched with revenues in the period when efforts are expended to generate revenues

accrued expenses

an adjusting entry serves two purposes: 1) It records the obligations, and 2) It recognizes the expenses

adjusting entries

are entries that are not triggered by an outside event (a sale, a purchase of goods etc.) but are activities monitored internally by a company

book value

cost minus accumulated depreciation

revenue and expense recognition

in accordance with generally accepted accounting principles (GAAP)

cost-salvage value

depreciable cost=

adjusting entries for "prepaid expenses"

payment of cash, that is recorded as an asset because service or benefit will be received in the future. cash payment before expense recorded

Deferrals

prepaid expenses, unearned revenues

insurance, supplies, advertising, rent, maintenance on equipment, fixed assets (depreciation)

prepayments often occur in regard to:

adjusting entries for "unearned revenues"

receipt of cash that is recorded as a liability because the revenue has not been earned. cash receipt before revenue recorded

revenue recognition principle

revenue recognized in the accounting period in which it is earned

accrued revenues

revenues earned but not yet received in cash or recorded

adjusting entries

A company must make _____ _______ every time it prepares financial statements.

rent, interest, taxes, salaries

Accrued expenses often occur in regard to:

rent, interest, services performed

Accrued revenues often occur in regard to:

balance sheet; income statement

Adjusting entries ensure that the correct amounts are on the ______ ______ and on the _____ _____.

Temporary

All revenue accounts, all expense accounts, dividends

Accrued Revenues

An adjusting entry serves two purposes: 1) it shows the receivable that exists, and 2) it records the revenues earned.

depreciation

Buildings, equipment, and vehicles (long-lived assets) are recorded as assets, rather than an expense, in the year acquired. Companies report a portion of the cost of a long-lived asset as an expense (depreciation) during each period of the asset's useful life (matching principle).

accurate

If adjusting statements are not done, the financial statements will not be _____.

income statement account; balance sheet account

Every adjusting entry will include one ____ _____ _____ and one ____ ______ _____.

Adjusting Entries for "accrued expenses"

Expenses incurred but not yet paid in cash or recorded. Expense recorded before Cash Payment

adjusting entries for "accrued revenues"

Revenues earned but not yet received in cash or recorded. Revenue recorded before cash receipt

closing the books

Temporary account balances are transferred to the permanent stockholders' equity account-Retained earnings

1. analyze business transactions 2. journalize the transactions 3. post to ledger accounts 4. prepare a trial balance 5. journalize and post adjusting entries 6. prepare an adjusted trial balance 7. prepare financial statements 8. journalize and post closing entries 9. prepare a post-closing trial balance

The accounting cycle

Closing entries

These serve two primary purposes: 1) Update the retained earnings account. 2) Close the temporary (I/S and dividend accounts)

revenues, expenses, dividends

Three types of accounts need to be closed:

rent, airline tickets, school tuition, magazine subscriptions, customer deposits

Unearned revenues often occur in regard to:

Accruing Interest Expense

When money is borrowed, interest is charged for the use of that money.

prepaid rent

When the cash is paid, the company has purchased an asset called:

supplies

When the cash is paid, the company has purchased an asset called:

accruing salary expense

a common expense that needs to be accrued before financial statements are prepared

accumulated depreciation

a contra asset account; appears just after the account it offsets (equipment) on the balance sheet

accumulated depreciation

a contra-account, a contra-asset

accumulated depreciation

a total depreciation expense taken to date

accruals

accrued revenues, accrued expenses

adjusted trial balance

after all adjusting entries are journalized and posted the company prepares another trial balance from the ledger accounts. Its purpose is to prove the equality of debit balances and credit balances in the ledger

Permanent

all asset accounts, all liability accounts, stockholders' equity accounts

depreciation expense

the portion of the cost allocated to any one accounting period

depreciable cost

the ultimate net cost of our asset, hence the amount we want to take as an expense

why adjusting entries are necessary

transactions can't always be recorded daily because it is inefficient (salaries, use of supplies, etc.); some transactions only occur with the passage of time and can only be recorded once that time has passed (interest and depreciation expense, use of pre-pd rent); some items are estimated and recorded at the end of the month before an invoice is received (utility or repair bill)

deferrals

types of adjusting entries

depreciation

when a company buys an asset that is used in the business (e.g. buildings, equipment, furniture, vehicles, computers, etc.) and it will be used for more than one year, GAAP says that the cost must be expensed over the accounting periods the asset will be used.