Accounting Chap 5

Question 1

PREPARE END-OF-PERIOD ADJUSTMENTS

Answer 1

Changes occur that affect the business’s financial condition:
Equipment wearing out
Prepaid insurance and supplies being
used up
Employees earning wages that have not yet been paid
Since these events have not been entered into the accounting system, ADJUSTING ENTRIES must be made

Question 2

reflect changes in account balances not involving an exchange with an outside party.

Answer 2

Adjusting entries:

Question 3

the matching of a specific period’s revenues and expenses, requires accounts to be brought up to date before financial statements are prepared.

Answer 3

MATCHING PRINCIPLE:

Question 4

MATCHING PRINCIPLE:

Answer 4

Requires the matching of REVENUES EARNED during an accounting period with the EXPENSES INCURRED
Provides the best measure of net income
Necessitates accounts be brought up to date before financial statements are prepared

Question 5

1. Reasons to Adjust the Trial Balance

Answer 5

a) Report all revenue earned.
b) Report all expenses incurred.
c) Accurately report the assets that have been used up.
d) Accurately report the liabilities that have been incurred but not yet paid.

Question 6

A 12-month period of time used as an accounting period

Answer 6

FISCAL YEAR:

Question 7

FISCAL YEAR:

Answer 7

Adjustments are made and financial statements are prepared at the end of a 12-month period.
Does not need to be the same as a calendar year
Many businesses schedule their fiscal year to end when business is slow

Question 8

Uses of supplies	
Examples:
Office supplies
Beginning inventory $100
Ending inventory $20
$100 - $20 = $80

Answer 8

Debit office supplies expense $80.00.

Credit office supplies $80.00.

Question 9

Loss in value of a fixed asset due to wear and tear and passage of time. Method of matching cost of a fixed asset against revenue that the fixed asset will help produce during the useful life.

Answer 9

Depreciation

Question 10

HISTORICAL COST PRINCIPLE

Answer 10

Assets are recorded at their actual cost
The cost remains on the books as long as the business owns the asset
No adjustments are made for changes in the market value of the asset

Question 11

The period of time that an asset is expected to help produce revenues

Answer 11

Useful life

Question 12

Useful life

Answer 12

Useful life expires as a result of wear and tear or because it no longer satisfies the needs of the business
As this happens, depreciation expense should be recognized and the value of the asset should be reduced

Question 13

Amount originally paid for a depreciable asset.

Answer 13

Original cost basis

Question 14

The expected market value or selling price of an asset at the end of its useful life
Also called:
Scrap value, or
Residual value

Answer 14

Salvage value

Question 15

Depreciation is a method of matching an asset’s original cost against the revenue produced over the useful life

Answer 15

Depreciation expense

Question 16

Depreciable cost = Cost – Salvage Value

Answer 16

Book Value = Cost – Accumulated Depreciation

Question 17

is the difference between cost and accumulated depreciation. It is not the same as market value and not intended to represent the selling price of the asset.

Answer 17

Book value, or undepreciated cost,

Question 18

means against or opposite

Answer 18

“Contra”

Question 19

“Contra”

Answer 19

Has a credit balance (the opposite of an asset)

Is deducted from the related asset account on the balance sheet

Question 20

THE WORK SHEET

Answer 20

Pulls together all of the information needed to:
Enter adjusting entries
Prepare financial statements
Is not a financial statement
Is not a formal part of the accounting system
Ordinarily, only the accountant uses a work sheet
Commonly in a 10-column format

Question 21

PREPARING THE WORK SHEET

5 STEPS

Answer 21

1. Prepare the Trial Balance.
2. Prepare the Adjustments.
3. Prepare the Adjusted Trial Balance.
4. Extend Adjusted Balances to the Income Statement and Balance Sheet columns.
5. Complete the Work Sheet.

Question 22

JOURNALIZING ADJUSTING ENTRIES

Answer 22

A. Post to the general ledger in the same manner as all other journal entries.
B. Write “Adjusting” in the Item column of the general ledger.

Question 23

1. Revenues are recorded when earned.
2. Expenses are recorded when incurred.
3. Measures income best for most businesses.

Answer 23

Accrual basis of accounting

Question 24

Accrual basis of accounting

Answer 24

Revenues are recorded when EARNED
Expenses are recorded when INCURRED
Recognizes receivables and payables
Offers the best matching of revenues and expenses
The best method of measuring income for most businesses
Smaller service organizations often use the cash or modified cash basis

Question 25

1. Revenues are recorded when cash is received.
2. Expenses are recorded when cash is paid.
3. Does not recognize prepaid assets or long-term assets.

Answer 25

Cash basis of accounting

Question 26

Cash basis of accounting

Answer 26

Revenues are recorded when cash is RECEIVED
Expenses are recorded when cash is PAID
Similar to the accrual basis if:
There are few receivables, payables, and assets
Can vary significantly if:
A business has many receivables, payables, and assets

Question 27

1. Uses the cash basis for recording revenue and expenses.
2. Assets acquired other than cash are recorded as assets instead of being recorded as expenses.
3. Does not account for receivables or for payables for services rendered.

Answer 27

Modified cash basis of accounting

Question 28

Modified cash basis of accounting

Answer 28

Combines aspects of the cash and accrual methods
A business uses the cash basis for recording revenues and most expenses
Exceptions are made when cash is paid for assets with useful lives greater than one accounting period
If cash is paid for equipment, buildings, supplies, or insurance, these are recorded as assets, and adjustments are made each period as under the accrual basis

Question 29

Depreciation of an asset is apportioned equally over its estimated useful life.
Expressed in terms of months or years.

Answer 29

Straight line method

Question 30

Most common Methods for calculating depreciation

Answer 30

Straight line method

Question 31

Straight-Line Method

Answer 31

A. An equal amount of depreciation will be taken each period.
B. Depreciation Expense per Year = (Cost – Salvage Value) /Years of Life
C. Rate of depreciation = 100% /Years of Life
D. A depreciation schedule is prepared showing the depreciation expense, accumulated depreciation, and book value for each year.