Accounting Cycle 5-7 Flashcards
What is the purpose of account adjustments?
Make sure revenues and expenses get recorded in the proper time period
What is “depreciation”?
The process whereby companies systematically allocate the cost of their tangible operating assets (other than land) as an expense in each period in which the asset is used
What are “deferrals”?
A category of adjustments for time differences in step 5 of the accounting cycle - adjust the accounts.
What are the steps to close the accounts?
Close revenues (and gains) to Retained Earnings
Close expenses (and losses) to Retained Earnings
Close dividends declared to Retained Earnings
What is “accrual-basis accounting”?
A method of accounting in which revenues are generally recorded when earned (rather than when cash is received). Same for expenses.
What are “deferred (prepaid) expenses”?
Assets arising from the payment of cash that have not been used or consumed by the end of the period
What form of accounting is required by GAAP?
Based on revenue/expense recognition principles, and the time-period assumption, accrual-basis accounting is required for corporations.
What are “temporary accounts”?
the accounts of revenue, expense, and dividend items that are used to collect the activities of only one period
revenues, gains, expenses, losses, dividends declared
What is a three-step procedure for making adjusting journal entries?
1) Identify pairs of income statement and balance sheet accounts that require adjustment
2) Calculate the amount of the adjustment based on the amount of revenue that was earned or the among of expense incurred during the time period
3) Record the adjusting journal entry
Cash will never be affected by adjustments!
What are “accrued revenues”?
Assets resulting from revenues that have been earned but for which no cash has yet been received.
What is an “adjusted trial balance”?
It’s the start of step 6, preparing financial statements, when the trial balance is updated to reflect the changes after adjusting the accounts
What is “cash-basis accounting”?
A method of accounting in which revenue is recorded when cash is received, regardless of when it is actually earned. Same for expenses.
Cash-basis accounting does not tie recognition of revenues and expenses to the actual business activity but rather to the exchange of cash.
What are “contra-accounts”?
Accounts that have a balance that is opposite the balance in its related account.
For long-lived assets the contra-account is called “accumulated depreciation”
What are “deferred (unearned) revenues”?
Liabilities arising from the receipt of cash for which revenue has not yet been earned.
How does the revenue recognition principle work?
A seller satisfies a performance obligation by transferring control of a promised good or service to a customer.
May be recognized at “a point in time” (purchase of a grill at lowes), or “over time” (fedex delivering a package).
What are two limitations of cash-basis accounting?
1) It does not link recognition of revenues and expenses to the actual business activity but rather the exchange of cash.
2) May not reflect all of the assets and liabilities of a company at a particular date.
What are “accruals”?
A category of adjustments for time differences in step 5 of the accounting cycle - adjust the accounts.
What is the “matching principle”?
Another name for the expense-recognition principle in the GAAP. States that expenses are recorded and reported in the same period as the revenue it helped to generate.
What are “permanent accounts”?
accounts of asset, liability, and stockholders’ equity items whose balances are carried forward from the current accounting period to future accounting periods
What order should financial statements be prepared?
1) The income statement
2) Net income and dividends declared are used to prepare the retained earnings statement
3) The balance sheet is prepared using the ending balance of retained earnings from the retained earnings statement
What are “accrued expenses”?
Liabilities arising from expenses that have been incurred but not yet paid in cash.
