Adjusting Journal Entries Flashcards
Deferred Revenue
- When did cash flow happen?
- What question do you ask to see if you should recognize it?
- Examples
- Type of account?
- Sequence of journals
- cash flow has happened in past
- are there any liabilities that have been fulfilled by delivery of G&S that should be recognized as revenue?
- Examples: Unearned rental revenue; Deferred subscription revenue; deposits. services over a period of time. You record revenue earned at the end of the period.
- Liability (C)
- First: Debit cash and credit unearned revenue/deferred revenue liability (bridges the gap). Then, when it’s time to recognize, Debit the liability and credit revenue.
Deferred Expense
- When did cash flow happen?
- What question do you ask to see if you should recognize it?
- Examples
- Type of account?
- Sequence of journals
- Cash flow happened in the past
- Are there any assets that have been used up in this period that should be expensed?
- Prepaid Expense, Prepaid Rent, Prepaid Insurance
- Asset
- First you debit a prepaid asset account to bridge the gap and credit cash. When it’s time to recognize, you debit the expense account and credit the asset.
Accrued Revenue
- When did cash flow happen?
- What question do you ask to see if you should recognize it?
- Examples
- Type of account?
- Sequence of journals
- Cash flow will happen in the future
- Have revenues been accumulated during the period that have not yet been recorded
- Interest receivable, rent receivable
- Receivable (A)
- First debit the asset account (a receivable bridges the gap) and credit revenue. Then, debit cash and credit the asset.
Accrued Expense
- When did cash flow happen?
- What question do you ask to see if you should recognize it?
- Examples
- Type of account?
- Sequence of journals
- Cash flow will happen in the future
- Have any expenses accumulated in the period that have not been recorded yet
- Income tax payable, interest payable, salary/wage payable
- Liability
- First you debit the expense account and credit the liability to bridge the gap. Then you debit the liability and credit the cash when cash is paid.
Differences of Depreciation vs. Amortization
- Depreciation is for physical, tangible assets (buildings; PPE (plant, property, equipment)
- Amortization is for intangible, abstract assets (trademark, customer list, even software)
Purpose of depreciation / amortization
to Allocate the original cost of long-lived asset over it’s useful life
Result: To match the total cost of asset to the revenue it generates over its period of use
Journalizing Depreciation
Depreciation expense is not deducted from tangible asset account. Instead, recorded in a contra asset account (XA) called Accumulated Depreciation (has Credit balance).
Dr. Depreciation Expense (+E, -SE) xx,xxx
Cr. Accumulated Depreciation (+XA, -A) xx,xxx
The accumulated depreciation value is subtracted from PPE on the B.S. to get “net book value”
Calculating depreciation expense (straight line formula; produces nice, smooth earnings)
Depreciation Expense = (Original Cost-Salvage Value)/Useful Life
Salvage value = how much asset will be worth when we’re done with it
Useful Life = number of periods of asset use
Managers choose the periods of useful life based on how long they intend to use it. Best estimates. Can be revised (and depreciation adjusted) going forward). Salvage value determined by useful life (ie are we selling a barely used airplane after 2 years or a very used airplane after 20).
Journalizing Amortization Expense
You can deduct amortization expense directly from the intangible Asset. But some companies are using Accumulated Amortization the way we have Accumulated Depreciation
But say you have 2100 in Software Asset account ( a three year license for software your biz uses). At the end of the year, the AJE would debit Software Amortization (+E, -SE) and credit Software (-A).
