CH 3 Flashcards
How do you distinguish between accrual basis and cash basis accounting
a. Accrual basis accounting
i. Record revenue and expense transactions at the time earnings-related activities.
b. Cash-basis accounting
i. Record revenues at the time that we receive cash and expenses at the time when we pay cash.
How do you record revenues using the revenue recognition principle and expenses using the matching principle?
a. Revenue recognition principle
i. Records revenues when you sell its product or provides its service to a consumer.
ii. Record the revenue in the period in which we earn it.
b. Matching principle
i. Recognize expenses in the same period as the revenues they help to generate.
ii. It is a cause and effect relationship between revenue and expense.
Is cash basis account is accepted for preparing financial statements?
no, because there is no documentation required.
What is the difference between accrual basis and cash basis accounting?
- Timing.
How do you demonstrate the purpose and recording of adjusting trial balance?
a. Purpose of adjusting entries is to bring accounts up to date because over time decreases the value of an asset.
i. Recognition principle and matching principle are essential because reporting can be adjusted at the end of the accounting period.
b. It is not practical to record lapsing of insurance coverage
c. End of the period adjusting entry-business adjust downward the balance of the asset and records insurance expense for the amount of the policy that has lapsed
d. If there isn’t adjusting entries, expenses and asset would understated or overstated.
i. Ultimately, this kind of misstatement can mislead users of financial statements
What is the benefit of using accrual base accounting?
i. Company can adjust their accounting journals. Adjusting entries help to record revenues in the period earned and expenses in the period they are incurred to generate those revenues. Another benefit is that, by properly recording revenues and expenses, we correctly state assets and liabilities.
How do you post adjusting entries and prepare an adjusted trail balance?
a. Define
i. Rent expenses( -SE, +E= - A)
ii. Prepaid rent( -A)
1. Preparid rent is an asset, and rent expense is an expense!
iii. Supplies expenses ( -SE + E )
1. supplies is asset
iv. Depreciation expense ( -SE + E )
v. Accumulated depreciation ( contra account) ( -A)
1. Depreciation equipment equals the total amount( book value)/ days of usefulness
vi. Unearned revenue ( -L)
1. revenue is paid in advance for goods or services that is promised to customer.
vii. Service revenue ( +R, +SE)
viii. Salaries expense( +E, -SE)
ix. Salaries payable (+ L)
x. Utilities expense( +E, -SE)
xi. Utilities payable(+ L)
xii. Interest expense ( +E, -SE)
xiii. Interest payable( +L)
xiv. Accounts receivable ( +A)
xv. Service revenue (+R, SE)
Are adjustments required if it does not involve revenue and expense activities, and revenue and expenses are reported at the same time as cash inflow.
no
What is the difference between accrual and prepayments?
i. Accrual
1. Is either revenue or expenses that carry after a period of time.
ii. Prepayments
1. Is early transaction before incurs expenses or revenue.
How do you prepare financial statements using the adjusted trail balance
a. First, prepare an income statement ( revenue minus expenses)
b. Second, prepare statement of stockholders equity [ common stock plus retained earnings (= RE, beginning of month + Net income – dividends) = SE ]
c. Prepare a classified balance sheet
i. Groups a company’s assets, liabilities, and stockholders’ equity accounts into several stand categories: current assets and long term assets.
d. Prepare statement of cash flows
How do you demonstrate the purposes and recording of closing entries and post-closing entries?
a. First transfer to three accounts- revenues, expenses, and dividends or temporary account
b. Second, transfer to Retained earnings account that are permanent accounts
c. Closing entries
d. Finally, the remaining balance of retained earnings is recorded in post-closing trial.
Define Closing entry
i. Transfer credit balances to the retained earning account, so we debit each account of these revenue accounts for its balance and credit retained earnings total.
Define Accrued revenue
When a company has earned revenue but hasn’t yet received cash or recorded an amount receivable. p. 121
Define adjusting entries
Entries used to record events that occur during the period but that have not yet been recorded by the end of the period. p. 112
Classified Balanced Sheet
Balance sheet that groups a company’s assets into current assets and long-term assets and that separates liabilities into current liabilities and long-term liabilities. p. 129
