Adjusting Journal Entries Flashcards
What are Explicit Transactions?
1) Clear event that caused the transaction
2) Easily identify the amount and timing of the transaction
What are Implicit Trasactions?
1) No defined trigger or event or timing or amount of transaction
2) Recorded by Adjusting Journal Entries
3) Never involve cash
4) Recorded internally
When are Adjusting Entries made?
At the end of Accounting cycle after having recorded the explicit transactions
Examples of Explicit Transactions
Purchasing Machinery Selling goods/services Paying wages Paying rent Collecting receivables Recognizing a loss on the disposal of an asset
Examples Of Implicit Transactions
Recognizing consumption of pre-paid insurance Recording impairment loss Recognizing Depreciation of equipment Recognizing amortization of patent Recording office supplies used
Expiration of prep-paid rent is implicit or explicit?
implicit because there is no clear trigger or timings or amount are not clearly defined
What is matching principle?
Business must recognize expense from a tranaction in the same period it recognizes revenue from the transaction
What is Straight Line Depreciation?
A method used to calculate depreciation for long lived assets
What is Gross Book Value or Original Cost
Price paid + extra expenses (delivery, installation or testing)
What is expected useful life of an asset?
Not based on how long the asset will last but how long the asset will be useful for the company
What is salvage value
The amount at which the asset can be sold after its useful life is over
Formula For Straightline Depreciation
Depreciation Expense = Gross Book Value - Salvage Value/useful life
Depreciation expense - Debit or Credit
Debit
Accumulated Depreciation (Contra Asset) - Debit or credit
Credit
Formula for Accumulated Depreciation
Depreciation Expense per period * Number of Periods
What is net book value or carrying value?
Original Cost of the asset less the accumulated depreciation
How is Net book value used?
It is used to determine gains or losses when selling long term assets
depreciation expense is a permanent account or temporary account
temporary account
Accumulated depreciation permanent account or temporary account
permanent account
Land Depreciation
Does not depreciate because it does not decrease in value and is not used up by business
Recording Depreciation
Matching principle - record expense in the same period the asset was providing the benefit
Historical Cost principle
Transactions should be recorded at the actual price paid by the transaction
What is accelarated Depreciation
Deduct more depreciation in the early years of the asset if it generates more revenue
Straight line depreciation is appropriate
when the rate at which the assets economic value decreases over time is even