Chapter 3

Question 1

Cash Basis

Answer 1

revenues are recorded when cash is RECEIVED

Expenses are recorded when cash is PAID

Question 2

Accrual Basis: required by GAAP

Answer 2

revenues are recorded when EARNED without regard as to when cash is received

Expenses are recorded when INCURRED or ACCRUED without regards to when cash is paid

Question 3

Accrual Basis of accounting

Answer 3

tells us when to record revenues and when to record expenses, 2 concepts Revenue Recognition, and Matching

Question 4

Revenue Recognition

Answer 4

record revenues when the earning process is complete, when they are realized and earned

Question 5

Expense recognition

Answer 5

match expenses incurred with revenues earned in the SAME accounting period the expense helped generate the revenue

Question 6

Deferral

Answer 6

the company has received or paid cash but the revenue or expense will be earned or used up in a future acct. period

Question 7

Deferred Revenues

Answer 7

“unearned revenues” cash is received from customers BEFORE the revenue is earned, when earned requires AJE (adjusting journal entry) to recognize revenue and decrease liability

Question 8

Deferred Expenses

Answer 8

“Pre Paid Expenses” cash is paid by the company BEFORE the expense has been incurred, if used up record expense and reduce asset

Question 9

Accruals

Answer 9

record revenue or expense when earned or used up & cash will be received or paid in a future acct. period

Question 10

Accrued Revenues (Accrued Asset)

Answer 10

these create “receivables” the company has earned the interest/rent/etc. in the current accounting period but will not receive the cash payment until the NEXT period

Question 11

Accrued Expenses (Accrued Liability)

Answer 11

these are “Accrued Expenses Payable” the company has used up the wages/rent/interest/etc. in the accounting period but will not pay for the expense in cash until the NEXT accounting period

Question 12

Rules of Recording AJE’s

Answer 12

AJE’s always use 2 account titles:
1. a) A balance sheet account & Asset or Liability
b) an income statement account either revenue or expenses

2. AJE’s NEVER use the “cash” account

Question 13

Purpose of AJE

Answer 13

purpose is to update revenues and expenses before year end

Question 14

Adjusted trial balance

Answer 14

these balances are used to prepare the formal financial statements, and to prove again that debits = credits

Question 15

Closing entries

Answer 15

all temporary (nominal) accounts must be closed at the end of period

Question 16

Temporary (Nominal) Accounts

Answer 16

1. Revenues and Gains (normal balance = credit balance)
2. Expenses and Losses (Normal balance = debit balance)
3. Dividends (withdrawals) (normal balance = debit)

Question 17

Purpose of Closing

Answer 17

1. to bring all temporary (nominal) account balances to zero
2. to transfer all balances in revenues, expenses, gains/losses, and dividends to retained earnings

Question 18

Permanent (REAL) accounts

Answer 18

ALL balance sheet accounts are real accounts that do not close and the ending balance becomes the beginning balance of the next year

Question 19

Accounting Cycle using Accrual Accounting

Answer 19

1. record journal entries as accounting events occur
2. post to ledger (t-accounts)
3. prepare trial balance
4. record adjustments (AJE) must make adjustments to update revenues and expenses at year end
5. Prepare trial balance after adjustment
6. prepare financial statements
7. record closing entries