Accounting 8 Flashcards
Accrual accounting
Attempting to record revenue and expenses when they happen (ties into time period concept)
Adjusting entries
An journal entry that assigns revenues and expenses to it’s appropriate fiscal period, ultimately bringing true value to the balance sheet.
Time period concept
A principle suggesting that accounting takes place over fiscal periods
-ties into accrual accounting
Revenue Recognition principle
A principle suggesting that accountants should record revenue as soon as it earned
-ties into income statement
Matching principle
A principle suggesting that accountants should record expenses that are related to the revenue when recorded
-ties into income statement
Cost principle
A principle suggesting that assets should be recorded at their original price (purchased price)
-ties into balance sheet
Conservatism principle
A principle suggests that assets should be neither overstated or understated
-ties into balance sheet
-balances the relationship between cost and fair value principles
Overstate
Worth less than stated
Understate
Worth more than stated
Fair value principle
After some time, your assets can be changed so that they match market values
-ties into balance sheet
Prepaid expense
An item paid for in advance, but one where the benefits extend into the future. Insurance is most common
Nominal account
Accounts that get deducted back to 0 at the start of every fiscal period.
Real account
Accounts that maintain their value at the start of a fiscal period
Closing
The process of resetting certain ledger accounts
Depreciation
The wasting away of an asset
Straight value Depreciation
When an asset depreciates over a steady rate
Accumulated depreciation
An account used to keep track of declining asset values
-a contra account
Contra account
An account used to reduce the value of an account for it has the opposite value of said account but is still the same type (debit/credit)
Valuation account
An account that is used together with an asset account to show its net value
Straight line depreciation equation
(original cost - salvage cost)
_____________________________
depreciation years
Declining balance method of depreciation equation
1st year: Original cost x depreciation rate.
2nd: Book value (undepreciated capital cost) x depreciation rate
Book Value/Net value
The current value of an asset
How do you get book value?
Take the original value and subtract the accumulated depreciation value and you get the next book value.
Why do we do adjustiung entries? (use IFRS principles and matching principle)
We adjust entries so that they reflect a company’s financial position more accurately. This is mainly because of the matching principle and time period concept because some assets such as insurance may not be entirely used up and are passed down to the next year. For the most concise financial information, we must adjust these entries.
Why do we use the accumulated depreciation account?
You want to keep things at the cost value according to the objectivity principle, a fundamental accounting principle where financial information/records must be recorded based on verifiable evidence to ensure trustworthiness.
In a closing balance, what happens when the values are on the inside?
Net loss
In a closing balance, what happens when the values are on the outside?
net profit
steps in preparing a worksheet
- fill in heading
2.enter account balances from general ledger
3.recording the adjusting entries for relevancy - extend accounts to their proper statements
-include updates in adjustments
a) balance sheet (a,l,e)
b)Income statement (Rev, exp, - balance the worksheet
Outer Ring (performed by accounting clerks)
- Transactions Occur
- Record them in General Journal
- Post to the Ledger
- Prepare Trial Balance and Financial Statements
Inner ring (performed by accoutants)
- Prepare Worksheet
- Formal Statements prepared
- Ledger Accounts Adjusted and Closed
- Post-Closing Trial Balance prepared
why does the first year rule exist?
Helps allow companies buy things late in the year so that they avoid tax
Supply adjustment dr/cr
Debit supplies expense
Credit supplies
Prepaid Insurance dr/cr
Debit insurance expense
Credit Prepaid insurance
Unearned revenue dr/cr
Debit Revenue
Credit unearned revenue (a liability on the balance sheet)
Late invoice dr/cr
Debit __ expense
Credit Account payable
Depreciation dr/cr
Debit depreciation expense
Credit Accumulated depreciation
