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
What is Double Declining Balance Method?
Accelarated depreciation method where you apply constant rate of deprectiation to the declining book value until it reaches the salvage value. Results in lower net income and taxes in early years and later lower depreciation expenses compensate and overall maintain the same amount.
What is Units Of measure Depreciation?
Assets that have an expected fixed output such as machine can produce 500000 products over life time and depreciation expense is calculated based on proportion of products created.
Recording a Gain/Loss on Sale
1) Debit accumulated depreciation
2) Debit cash
3) Credit Original Cost
4) Credit a Gain on sale or Debit loss on sale
What is impairment?
If a manufacturing company ceases to produce and making spare parts, value of asset would decrease and it would be more costly to service it. Record an impairment charge to decrease the value of asset
Formula for Loss on Impairment
Net book value - Fair market value
2 Ways to record a loss on impairment
1) Debit loss on impairment
2) Credit Accumulated Depreciation
OR
1) Debit loss on impairment
2) Credit theAsset value
How is the depreciation expense calculated after impairment?
Based on the assets new value
What is amortization?
Expenses on Non-physical or intangible assets such as patents, pre-paid rent /insurance.
Recording Amortization Expense for pre-paid rent
1) Prepaid rent(Amortization expense) is Debited, Accumulated amortization is credited
2) Amortization expense is debited and pre-paid rent is credited
Can goodwill be depreciated or amortized?
Good will cannot be depreciated or amortized.
What is perpetual inventory system
Inventory is expensed at the time inventory is sold. Inventory account is credited and COGS is debited. Explicit Transaction is recorded.
What is periodic inventory system
Periodically determining COGS by physically counting ending inventory and subtracting it from beginning inventory + inventory purchased during the period. Inventory is recorded as implicit transaction so requires adjusting entries.
Goods Available for Sale
Beginning inventory + Purchased inventory
COGS
Beginning inventory + purchased inventory - Ending inventory
What is the journal entry to record a sale
1) COGS is debited 2) Inventory is credited
What are the methods used to value inventory?
1)FIFO 2)LIFO. Cost of Goods sold can be calculated using either of the methods
What is specific identification inventory valuation?
The inventory is valued for the specific cost.
What method does IFRS use?
Only FIFO
What method does GAAP use?
Both LIFO and FIFO and all others
What is product cost?
Cost of buying raw materials, manufacturing and ultimately distributing. Tied to the product.
What is period cost?
All other costs company incurs while doing business not directly related to the product itself.
Examples of Product Cost
Wages of employees, material to produce goods
Examples of Period Costs
R & D, Executive salaries
What is deferral?
Deferral is delay in recognizing revenue or expense
What is Deferred revenue or Unearned Revenue?
Liability Account. Company receives cash before it recognizes revenue. Example Gym membership.
Deferred Revenue Journal Entry
1) Cash Debit, Deferred Revenue Credit.
2) When service is provided, revenue credit and deferred revenue debit.
What is deferred expense?
Company pays cash before recognizing the expense.
Example of Deferred expense
Pre-paid rent
Journal Entry for Pre-paid rent/Deferred Expense
1) Cash credited , pre-paid rent debit
2) When rent expense is realised, rent expense debit, pre-paid rent credit
What is accrual?
Accrual occurs when company recognizes revnue or expenses before transfer of cash happens
What is accrued revenue?
Revenue is reported before cash is received
Journal Entry for Accrued Revenue
1) Accounts Receivable debited, Accrued Revenue is credit
2) When cash is received: Cash is debited, Accounts Receivable credited
What is accrued expense?
Expense is recognized before company pays for it
Example of Accrued interest
Interest paid on loans, Wages payable, taxes payable,accrued utilities expense. Usually it is accrued and payments are made as arrears at the end of accounting period
Journal Entries for Accrued Expense
1) Debit Interest Expense, Credit Accrued Interest (Liability)
2) When cash is paid out, Debit Accrued Interest, Credit Cash
Accrued Revenue - Asset or Liability
Asset
Accrued Expenses - Asset or Liability
Liability
Deferred Expense - Asset or Liability
Asset
Deferred Revenue - Asset or Liability
Liability
Tax account that shows up on income statement
Income tax expense
Tac account that shows on Balance Sheet
Deferred Income taxes
Types of Books a company has
1)Financial books 2)Tax books
What is Taxable income?
Gross income - Company’s deductions(company’s expenses)
What is income before taxes?
Revenues + Gains - (loss+expenses [excluding tax expense])
What can create timing difference between taxable income and income before taxes
Depreciation. Because company might want to record higher depreciation so taxable income is reduced. Also they may want to show higher earnings so Depreciation expense should be less.
Taxable Income will use which Depreciation Method
Accelarated Depreciation. Creates less taxable income
Income Before Taxes On books
Straight Line Depreciation. Creates higher pretax income.
What is Deferred Tax Liability?
Initially Tax depreciation is higher than Book depreciation. So tax different is created, and this will cause taxes to be due in the future. This obligation to pay taxes in the future on the income in the current period is Deferred Tax Liability.
Journal entries for Deferred Tax Liabiltiy
1) Income Tax Expense (calculated based on income before taxes) * tax rate ->Debit
2) Income Taxes Payable (calculated based on accelarated depreciation) * tax rate -> Credit
3) Deferred Tax liability -> Credit (Income Tax Expense - Taxes Payable)
When does Deferred Tax Liability occur
When taxable income < Reported income
Over time the balance of Deferred tax liability and Deferred tax asset will become 0.
These happeb because of time difference, over the course of companys life they will go to 0.
When does Deferred Tax Asset occur?
When company prepaid taxes, taxable income > income tax expense calculated off of IBT.
Example of When Deferred Tax Asset occurs
When company receives prepayments, in cash but revenue is recognized later (Deferred revenue), example Gym membership, the timing difference incurs Deferred tax asset
Journal Entry for Deferred Tax Asset
Income Tax Expense (lower than income taxes payable) ->Debit
Deferred Tax Asset -> Debit (Difference between income tax expense and taxes payable)
Income Taxes Payable (higher) ->credit
Impact of Change in accounting policities on amount or timing of Cash Flows
They wont be affected as they are based on taxbooks. Tax books are not impacted with change in accounting policies.
