ACC 224 (chapter 3) Flashcards
What is the Periodicity (Time Period) Assumption?
The economic activities of a business can be separated into artificial time periods.
What are the most common publicly released results?
Quarterly and annually.
What are interim time periods?
Monthly and quarterly.
What is a Fiscal Year?
An accounting period that is one year in length, beginning on the first of one month and ending on the last day of the month, 12 months later.
What is a Calendar Year?
A fiscal year that coincides with a normal calendar.
What is an example of a fiscal year?
The ‘2024 Fiscal Year’ runs from January 1, 2024 to December 31, 2024.
What is Accrual-Basis Accounting?
Companies record transactions in the period in which they occur and affect the financial statements.
When do companies recognize revenues under Accrual-Basis Accounting?
When they are earned (goods or services provided), regardless of when they receive cash.
When do companies recognize expenses under Accrual-Basis Accounting?
When they are incurred (used up), regardless of when the company pays cash.
What accounting principles require Accrual-Basis Accounting?
Generally Accepted Accounting Principles (GAAP).
What is Cash-Basis Accounting?
Companies record transactions in the period in which cash exchanges hands.
When is revenue recognized in Cash-Basis Accounting?
Revenue is recognized when cash is received.
When are expenses recognized in Cash-Basis Accounting?
Expenses are recognized when cash is paid.
Is Cash-Basis Accounting allowed under GAAP?
No, it is not allowed under GAAP accounting.
What are the advantages of Accrual Accounting?
Accounts for obligations that will occur in the future.
What are the disadvantages of Accrual Accounting?
Not specified in the provided text.
What is the effect on cash and net income for purchasing $100 of supplies for cash?
Net Cash: -$100
Net Income: $0
What is the effect on cash and net income for recording an adjusting entry to record use of $20 of supplies?
Net Cash: $0
Net Income: -$20
What is the effect on cash and net income for making sales of $1,300, all on account?
Net Cash: $0
Net Income: $1,300
What is the effect on cash and net income for receiving $800 from customers in payment of their accounts?
Net Cash: +$800
Net Income: $0
What is the effect on cash and net income for purchasing equipment for cash, $2,500?
Net Cash: -$2,500
Net Income: $0
What is the effect on cash and net income for recording depreciation of building for period used, $600?
Net Cash: $0
Net Income: -$600
What is the Revenue Recognition Principle?
Companies recognize revenue in the accounting period in which the performance obligation is satisfied, i.e., perform the service or provide the goods.
What is the first step in the revenue recognition process?
Identify the contract with the customer.
What is the second step in the revenue recognition process?
Identify the separate performance obligations in the contract.
What is the third step in the revenue recognition process?
Determine the transaction price.
When is revenue recognized?
Revenue is recognized when the performance obligation is satisfied.
What is the fifth step in the revenue recognition process?
Recognize revenue when each performance obligation is satisfied.
When should Southwest Airlines recognize revenue for an advance-purchase airline ticket sold in September for a flight in December?
Recognize revenue in December.
When should Major League Baseball teams recognize revenue for ticket sales before the season starts?
Recognize revenue as each game occurs.
When should RBC Financial Group recognize revenue for a loan made on August 1?
Recognize revenue when the loan and interest are repayable in full.
When should Target recognize revenue for a sweater ordered in August and received in September?
Recognize revenue in September.
What is the Expense Recognition Principle?
Companies recognize expenses in the accounting period in which they are used to generate revenue.
This may or may not be the period in which the expense is paid.
When are expenses recognized?
Expenses are recognized when the company ‘uses it up’.
Examples include office supplies, inventory, machinery, interest, and rent.
When are office supplies expensed?
Office supplies are expensed when employees in the office use them.
When is inventory expensed?
Inventory is expensed when sold.
When is machinery and equipment expensed?
Machinery and equipment are expensed over the periods in which the company uses them to generate revenue.
When is interest expensed?
Interest is expensed over the life of the loan.
When is rent expensed?
Rent is expensed when the company occupies the space.
What is the Time Period Assumption?
The economic life of a business can be divided into artificial time periods.
What is the Revenue Recognition Principle?
Revenue is recognized in the period in which the performance obligation is satisfied.
What is the relationship between revenue and expense recognition?
Revenue and expenses are recognized in accordance with generally accepted accounting principles (GAAP).
What is the Expense Recognition Principle?
Expenses are recognized in the period that efforts are made to generate revenue.
What are adjusting entries?
Entries made at the end of the accounting period to record revenues earned and expenses incurred.
Adjusting entries ensure that the revenue and expense recognition principles are followed.
When are adjusting entries necessary?
When the accounting records (trial balance) are not already up-to-date.
This can occur if it is not efficient to record certain entries every day or if nothing has occurred to prompt an entry.
What is an example of an adjusting entry due to the use of an asset?
Using up rented space or using a piece of machinery in the assembly process.
This reflects that the expense has occurred over a certain period.
What is an example of an adjusting entry when no bill has been received?
Utilities have been used but the company has not received the bill.
This situation necessitates an adjusting entry.
What accounts do adjusting entries always include?
Either a revenue or expense account and a corresponding asset or liability account.
What is an example of a prepaid expense?
Using up an asset for which the company has already paid cash.
This involves an asset and an expense.
What is an example of unearned revenue?
Performing a service or providing goods for which the company has already received cash.
This involves a liability and revenue.
What is an accrued expense?
Incurring an obligation to pay cash for the use of something during the period.
This involves a liability and an expense.
What is accrued revenue?
Performing a service or providing goods for which the company has not yet received cash.
This involves an asset and revenue.
When are adjusting entries required?
Every time a company prepares financial statements.
What are adjusting entries for deferrals?
Adjusting entries for deferrals are entries made to account for expenses that have been paid in cash before they are used or consumed.
Examples include prepaid expenses like supplies, insurance, rent, and depreciation.
What is the effect of not making adjusting entries for deferrals?
If the entry is not made, assets are overstated, and expenses are understated.
What is the journal entry for prepaid expenses?
Debit an expense account and credit an asset account.
What are common accounts for prepaid expenses?
Common accounts include supplies, insurance, rent, and depreciation.
What is the adjusting entry for prepaid expenses when supplies are used?
The expense Supplies Expense is increased by $1,500; the asset Supplies is decreased by $1,500.
General Journal entry: Debit Supplies Expense $1,500, Credit Supplies $1,500.
What is the initial amount of supplies purchased by the company?
$2,500.
How much of the supplies remained at the end of the month?
$1,000.
What is the adjusting entry for a prepaid insurance policy at the end of the first month?
The expense Insurance Expense is increased by $50; the asset Prepaid Insurance is decreased by $50.
General Journal entry: Debit Insurance Expense $50, Credit Prepaid Insurance $50.
What was the cost of the 1-year insurance policy paid by the company?
$600.
What is the monthly expense for the insurance policy?
$50.
What is the balance of Prepaid Insurance after the adjusting entry?
$550.
What is the balance of Insurance Expense after the adjusting entry?
$50.
What is the purpose of adjusting entries for deferrals?
Adjusting entries for deferrals are used to allocate expenses and revenues to the appropriate accounting period.
What is depreciation?
Depreciation is the process of allocating the cost of an asset to expense over its useful life.
What is accumulated depreciation?
Accumulated Depreciation is a contra asset account that records the cumulative amount of depreciation expense recognized.
What does book value represent?
Book value is the difference between the cost of any depreciable asset and its accumulated depreciation.
What is an example of a prepaid expense?
A company purchases equipment for $5,000 at the beginning of the month and expects to use it over several years with an estimated cost of $40 per month.
This example illustrates how a prepaid expense is recorded and adjusted over time.
How is depreciation expense recorded in the journal?
The journal entry records a debit to Depreciation Expense and a credit to Accumulated Depreciation-Equipment.
Example: Debit Depreciation Expense $40 and credit Accumulated Depreciation-Equipment $40 on Oct 31.
What happens to expenses and assets during depreciation?
Debits increase expenses, while accumulated depreciation decreases the book value of the asset.
What are adjusting entries for deferrals?
Adjusting entries for deferrals are made to recognize revenues or expenses that have been deferred to a future period.
What is unearned revenue?
Unearned revenue is cash received before services are performed or goods are delivered.
How do you record unearned revenue?
Debit a liability account and credit a revenue account.
What happens if unearned revenue is not recorded?
Liabilities are overstated, and revenue is understated.
What are common accounts for unearned revenues?
Common accounts include rental income, tickets sold prior to an event, subscriptions, and deposits paid by customers.
What is the adjusting entry for unearned revenue when services are performed?
Debit Unearned Service Revenue and credit Service Revenue.
What is the example of unearned revenue adjustment?
Received $1,200 on 10/2 for services to be completed by 12/31. During Oct., $400 of services were performed.
The liability Unearned Service Revenue is decreased by $400; the revenue Service Revenue is increased by $400.
What is the journal entry for recording revenue for services performed?
Debit Unearned Service Revenue $400 and credit Service Revenue $400.
What is the balance of Unearned Service Revenue after the adjustment?
The balance of Unearned Service Revenue is $800 after the adjustment.
What is the balance of Service Revenue after the adjustment?
The balance of Service Revenue is $10,400 after the adjustment.
What are Accrued Revenues?
Revenues for services performed but not yet received in cash or recorded.
What is the adjusting entry for accrued revenues?
Debit an asset account and credit a revenue account.
What happens if no adjusting entry is made for accrued revenues?
Assets and revenues are understated.
What is an example of accrued revenue?
Performed $200 of services for a client in October that will not be billed and paid until November.
The asset Accounts Receivable is increased by $200; the revenue Service Revenue is increased by $200.
How do debits and credits affect accrued revenues?
Debits increase assets; credit Service Revenue increases revenues.
What is the basic analysis equation for accrued revenues?
Assets = Liabilities + Stockholders’ Equity.
What is the journal entry for recording accrued revenue?
Debit Accounts Receivable $200 and credit Service Revenue $200.
What are accrued expenses?
Expenses incurred but not yet paid in cash.
Common accounts include interest, salaries and wages, bad debts (contra-asset).
How do you record accrued expenses?
Debit an expense account and credit a liability account.
Without an entry, expenses and liabilities will be understated.
What is the adjusting entry for accrued expenses?
Debit an expense account and credit a liability account.
What is an example of an accrued expense?
A company signed a 3-month $5,000 note payable on October 1 with a 12% annual interest rate.
The interest expense is increased by $50, and the interest payable liability is increased by $50.
What is the journal entry to record interest on notes payable?
Debit Interest Expense $50 and credit Interest Payable $50.
What happens to assets, liabilities, and stockholders’ equity when recording accrued interest?
Liabilities increase by $50 (Interest Payable), and stockholders’ equity decreases by $50 (Interest Expense).
What are adjusting entries for accruals?
Adjusting entries for accruals are made to record revenues and expenses that have been earned or incurred but not yet recorded in the accounts.
What is an accrued expense example?
An example of an accrued expense is when employees are paid for work performed from October 15-26 on October 26, and the next payment is due on November 9.
What is the total salary for a five-day work week?
The total salary for a five-day work week is $2,000, which breaks down to $400 per day.
What is the adjustment for salaries and wages expense?
The salaries and wages expense is increased by $1,200.
What is the adjustment for salaries and wages payable?
The salaries and wages payable liability is increased by $1,200.
What is the debit entry for salaries and wages expense?
The debit entry for salaries and wages expense is $1,200.
What is the credit entry for salaries and wages payable?
The credit entry for salaries and wages payable is $1,200.
What is recorded in the general journal for accrued salaries and wages?
In the general journal, the entry records Salaries and Wages Expense and Salaries and Wages Payable, each for $1,200.
What is the balance for salaries and wages expense after adjustment?
The balance for salaries and wages expense after adjustment is $5,200.
What is the balance for salaries and wages payable after adjustment?
The balance for salaries and wages payable after adjustment is $1,200.
What are the types of adjustments in accrual accounting?
Prepaid expenses, Unearned revenues, Accrued revenues, Accrued expenses.
What happens to assets and expenses before adjusting for prepaid expenses?
Assets are overstated and expenses are understated.
What is the adjusting entry for prepaid expenses?
Dr. Expenses, Cr. Assets or Contra Assets.
What happens to liabilities and revenues before adjusting for unearned revenues?
Liabilities are overstated and revenues are understated.
What is the adjusting entry for unearned revenues?
Dr. Liabilities, Cr. Revenues.
What happens to assets and revenues before adjusting for accrued revenues?
Assets are understated and revenues are understated.
What is the adjusting entry for accrued revenues?
Dr. Assets, Cr. Revenues.
What happens to expenses and liabilities before adjusting for accrued expenses?
Expenses are understated and liabilities are understated.
What is the adjusting entry for accrued expenses?
Dr. Expenses, Cr. Liabilities.
What is the unadjusted trial balance for Nardelli Consulting as of May 31, 2027?
Total Debits: $31,700, Total Credits: $31,700.
What supplies have been used during May 2027?
$900 of supplies have been used.
What is the utilities expense incurred but not paid on May 31, 2027?
$250.
What is the duration of the insurance policy purchased on May 1?
An insurance policy for 2 years.
How much of the unearned service revenue remains unearned at the end of May 2027?
$400.
What is the weekly payroll for Nardelli Consulting’s employees?
$1,800 for two employees ($900 each).
What is the monthly depreciation for the equipment?
$190 per month.
What services were performed but not recorded as of May 31, 2027?
Invoices representing $1,700 of services.
What is an Adjusted Trial Balance?
The trial balance after all adjusting entries have been posted.
What does the Adjusted Trial Balance show?
It shows the balances of all accounts.
What is the purpose of the Adjusted Trial Balance?
To prove the equality of debits and credits.
What does the Adjusted Trial Balance not prove?
It does not prove that all entries have been made, nor does it prove that all entries are correct.
What is the primary basis for the financial statements?
The Adjusted Trial Balance.
