Adjusting The Accounts Flashcards
how is net income calculated
revenues - expenses
define time period assumption
another term for it
division of economic life of a business into artificial time period
separating economic life and business
aka PERIODICITY ASSUMPTION
when are accounting time periods
monthly
quarterly
annually
monthly and quarterly time periods are called what
INTERIM PERIODS
FISCAL YEAR
accounting period that is ONE YEAR in length
begins with the first day of a month and ends 12 months later on the LAST day of the month
CALENDAR YEAR
01/01 - 12/31
define accrual basis accounting
transactions are recorded that change a company’s financial statements IN THE PERIODS IN WHICH THE EVENTS OCCUR
TRANSACTIONS ARE RECORDED KUNG KAILAN GINAWA
define cash-basis accounting
companies record revenue at the time they receive cash
define performance obligation
when a company agrees to performa service or sell a product to a customer
define REVENUE RECOGNITION PPRINCIPLE
requires that company must recognize revenue in the acctg period in which THE PERFORMANCE OBLIGATION IS SATISFIED
record revenue in june when it was performed rather than july when you have received the payment
define EXPENSE RECOGNITION PRINCIPLE
recogize expenses in the time period in which THEY MAKE EFFORTS (consume assets or incur liabilities) TO GENERATE REVENUE
define ADJUSTING ENTRIES
used in order for revenues to be recorded in the period in which services are performed and expenses are recognized in which they are incurred
ENSURES THAT THE REVENUE RECOGNITION AND EXPENSE RECOGNITION PRINCIPLES ARE FOLLOWED
why is an adjusting entry necessary
because the trial balance may not be up to date
what does an adjusting entry entail
- required for every company’s financial statement
- every adjusting entry must include 1 income statement account and 1 statement of financial position account
2 types of adjusting entries
defferals
accruals
Define Deferrals
expenses/revenues that are recognized at a date LATER THAN THE POINT WHEN CASH WAS ORIGINALLY EXCHANGED
2 types of deferrals
prepaid expenses
unearned revenues
prepaid expenses
expenses paid in cash BEFORE they are used or consumed
costs that EXPIRE either with the PASSAGE OF TIME or THROUGH USE
example of prepaid expenses
rent
insurance
supplies
what happens during an adjusting entry in a prepaid expense
debit increase to expense account
credit decrease to an asset account
purchase of supplies for 2500
inventory reveals that 1000 of the supplies are still on hand
debit increase in supplies expense
credit decrease in supplies account
insurance paid in advance adjustment
debit increase in expenses (insurance expenses account)
credit decrease in assets (prepaid insurance account)
Define depreciation
process of allocating the cost of an asset to expense over its useful life
useful life = period of service
is depreciation an allocation concept?
yes. it is NOT a valuation concept
it allocates an asset’s cost to the periods in which it is used
it does not attempt to report the actual change in the value of the asset
what is the contra asset account of depreciation?
accumulated depreciation
= credit balance
depreciation effect
debit increase in depreciation expense
credit increase in contra asset account (accumulated depreciation)
define book value
difference between the cost of any depreciable asset and its related accumulated depreciation
what is the purpose of depreciation?
cost allocation (not valuation)
Define UNEARNED REVENUES
cash received before services are performed
the company has a PERFORMANCE OBLIGATION (liability) to is customers
credit increase in liability
debit increase in assets (cash)
unearned revenue is the opposite of prepaid expense
unearned revenue of one company is prepaid expense on another company
what is the adjusting entry for unearned revenues?
debit decrease to a liability account
credit increase to a revenue account
both in onwer’s equity
2 types of accruals
accrued revenues
accrued expenses
define accrued revenues
revenue for services performed but not yet received in cash or recorded
also applies to services performed but the bill is not yet collected
adjusting entry for accrued revenues
debit increase in asset account
credit increase to revenue account
collection of receivables
debit increase to cash
credit decrease to accounts receivable
define accrued expenses
expenses incurred but not yet paid in cash or not yet recorded
adjusting entry for an accrued expense
debit increase to expense account (TATAAS ang bayarin)
credit increase to liability account
accrued interest effect
- face value of note
- annual interest rate
- length of time the note is outstanding
debit increase to expense account
credit increase to liability account
accrued salaries and wages EFFECT
debit increase expenses (salaries and wages expense account)
credit increase liabilities (salaries and wages payable
prepaid expenses
assets overstated
expenses understated
debit increase expenses
credit decrease asset
unearned revenues effect
liabilities overstated
revenue understated
debit decrease liabilities
credit increase revenues
accrued revenues
assets understated
revenues understated
debit increase asset account
credit increase revenue account
accrued expenses
expenses understated
liabilities understated
debit increase expenses
credit increase liabilities
