6 - Adjustments, Depreciation, & Closing Entries

Question 1

Adjustments

Answer 1

recorded accounting changes that ensures all account balances are correct and accurate

Question 2

Prepaid Expenses

Answer 2

payments for expenses made in advance

Question 3

Examples of Prepaid Expenses

Answer 3

Office Supplies
Prepaid Rent
Prepaid Insurance

Question 4

Prepaid Expenses (asset) accounts change into ________ accounts after being used.

Answer 4

Expense accounts

Question 5

When are prepaid expenses recorded?

Answer 5

at the end of the fiscal period

Question 6

Prepaid assets are __________ accounts when purchased.

Answer 6

asset

Question 7

Adjusting Entries

Answer 7

Entries that are made to…
* record the conversion of prepaid assets to expenses
* correct the account balances for the balance sheet
* record the apporpriate xpense for the period on the income statement

Question 8

Adjusting entries always involve a change in both an _______________________ account and _______________________ account.

Answer 8

income statment, balance sheet

Question 9

Adjusting entries never involve ____________.

Answer 9

cash

Question 10

How do you calculate the amount of supplies used? Which account and side of account does this value go into?

Answer 10

1. Count Supplies Remaining
2. ## Amount Used = Total Supplies purchased - supplies remaininggoes into supplies expense account on debit side

Question 11

Depreciation

Answer 11

the allocation of the cost of a fixed asset to the fiscal periods in which it is used

Question 12

Depreciation is a(n) ____________ account.

Answer 12

expense

Question 13

Which financial statement does depreciation appear on?

Answer 13

Income Statement

Question 14

__________ cannot depreciate

Answer 14

Land… it is the only fixed asset which cannot depreciate

Question 15

Alternate Names for Depreciation

Answer 15

amortization
capital cost allowance

Capital Cost Allowance is usually used when discusising Income Taxes

Question 16

Two Methods of Calculating Deprecitation

Answer 16

1. Straight Line Depreciation
2. Declining Balance Depreciation

Question 17

Straight Line Depreciation

Answer 17

asset declines by same amount each fiscal period

calculated by: account value - % depreciation x original value

**note: ** when fixed asset reaches $0, it does not depreciate further

Question 18

Declining Balance Depreciation

Answer 18

depreciates greater in the first years compared to later years

calculated by: “updated account value” - % depreciation x “updated account value” <– like the compount intrest but backwards

Question 19

Steps to Journalize Adjusting Entries / Depreciation

Answer 19

1. Write all appropriate headers (eg. page number, date, and year)
2. Record debited account (i.e the expense account) and amount
3. Indent and Record credited account (i.e. prepaid expense account) and amount
4. Write description (eg. “to record supplies used in Januray” or “to record rent for the month/for x month(s)” )

essentially the same as recording anything to journal

note: in the general ledger write “adjusting entry” in the particular

Question 20

Closing the Books

Answer 20

the process by which revenue and expense accounts are reduced to zero at the end of each accounting period

Question 21

Temporary Accounts

Answer 21

accounts which are reduced to zero at the end of each accounting period

account balances do not carry forward to the next accounting period

Question 22

Permanent Accounts

Answer 22

accounts whose balances ARE carried forward from accounting period to accounting period

Question 23

Which accounts are permanent accounts?

Answer 23

all balance sheet accounts (A, L, O.E.) except drawings

Owner can “draw” different amount of assets each accounting period. Therefore, it is a temporary account.

Question 24

Which accounts are temporary?

Answer 24

Revenue and Expense Accounts

Question 25

Order to Close the Books

Answer 25

1. **R**evenue 2. **E**xpense 3. **I**ncome Summary 4. **D**rawings ## Footnote Journalizing: * write "to close the ____ account" in description * expense accounts can be closed as one big compound entry for efficiency Posting * write "closing entry" in particulars for the accounts

Question 26

Closing Entries

Answer 26

Journal entries when closing revenue and expense accounts

Question 27

Steps to Close the Books

Answer 27

1. Transfer Revenue to Income Summary 2. Transfer Expenses to Income Summary 3. Transfer Income Summary to Owner's Equity (Capital) 4. Transfer Drawings to Owner's Equity (Capital) ## Footnote * ensure the correct amount is recorded on the correct **side** of the Income Summary so that net profit/loss is calculated correctly * DOUBLE UNDERLINE CLOSED ACCOUNTS IN THE GENERAL LEDGER * in the ledger, there is nothing placed in the Dr/Cr column if balance is 0 because account has no value * for step 3, write "to transfer net _ _ _ to the owner's Capital account."

Question 28

A credit balance in the income summary represnts a _ _ _ _.

Answer 28

net income | Why?

Question 29

A debit balance in the income summary represents a _ _ _ _ _.

Answer 29

net loss | Why?

Question 30

Principle of Materiality

Answer 30

requires that one records the information that could affect the decisions of the people who look at the financial statements, when the statements are prepared ## Footnote example: if you know someone can never pay of their accounts receivable, that info must be disclosed

Question 31

Principle of Conservatism

Answer 31

requires that accountants must choose the option that will result in lower net income and assets (when applicable)

Question 32

Purpose of Closing the Books

Answer 32

1. to update the owner's Capital account 2. to prepare the reveunue and expense accounts for the next accoutning period by reducint their balances to zero