Ch 3: Adjusting Accts for Financial Statements Flashcards
the value of info is often linked to..
its timeliness
time period assumption
presumes a business activities can be divided into specific time periods
annual financial statements
reports covering a 1 year period
interim financial statements
report covering 1,3,6 month period
fiscal year fnan statement
consisting of 12 consecutive months or 52 weeks
natural business year fnan statement
12 month period that ends when sales are at lowest
accrual basis accounting
records revenue when services/goods are delivered and records expenses when incurred
required by gaap
(goes month by month(cost/months))
cash basis accoutning
records revenue when cash is recieved and record expenses when cash is paid
*all at once
what are the 4 types of adjustments
-deferral expense
-deferral of revenue
-accrued expense
-accrued revenue
what is the 3 step process for adjustments
1-determine what the current acc balance equals
2- determine what the current balance acc should equal
3- record an adjustment entry that shows process of going from step 1 to step 2
every adjusting entry affects???
One or more balance sheet accounts and one or more income statement accounts
adjusting entries do not affect what account
the cash account
when assets such as prepaid get used what does it become
it becomes an expense
prepaid expenses reflect transactions when cash is paid…
before the related expense is recognized
plant assets
-refer to long term tangible assets that are used to produce/ sell goods/services.
-Are expected to provide benefits for more than 1 acct period.
-eventually deprecitate
-ex machine
depreciation
allocation of the costs of these assets over their life
contra asset
acc linked w another acc and has an opposite normal balance
book value
net amount-acc depreciation
straight line depreciation
(cost of asset-salvage value)
/
useful life months or years
journal entry for depreciation
debit-depreciation expense
credit-accumulated depreciation
deferred expeses accounts
-supplies
-prepaid insurance
-depreciation
deferred revenue definition + adj entry
unearned revenue-when you receive money in advance but have not provided the service yet
D-unearned revenue
C-revenue
accrued expenses definition + adj entry
costs that are incurred but have not been paid for
D-salaries expense
C-salaries payable
accrued expenses accounts
-salaries payable
-affect the payable
accrued revenue defenition + adj entry
when you have provided the goods or service but have not received payment
D-accts recievable
C- revenue
accrued revenue accounts
-accounts receivable
Before the adjusting entry for a deferral of an expense, the expenses will be _________ and the assets will be _________
understated, overstated
deferred expenses is also refered to as
prepaid expenses
deferred expense definition + adj entry
prepayment of assets such as supplies or insaurance that are expensed over time as they are used up
D- supplies expense
C- supplies
what acct should be used when a questions states “for which cash will be received in the following period”
accounts recievable
adjusting entry to reflect expiration of the insurance
D- insurance Expense
C- Prepaid Insurance
adjusting entry to reflect expiration of supplies
D- Supplies Expense
C- Supplies
when an asset is expected to last forever- what do we put as they entry
no journal entry required
Unadjusted trial balance
list of ledger accts before adj are recorded
adjusted trial balance
a list of accs and balances after adjusting entries have been recorded and posted to the ledger
closing process
occurs at period end after fnan statements have been prepared
-revenues, expenses, dividends reset to 0
temporary accounts
closed at period end
consists of revenue, expense, dividends, income summary
permanent accts
not closed at period end-doesnt reset to 0
assets, liability, common stock, and retained earnings
income summary account
temporary account used only for the closing processes that has a. credit total for revenues and a debit for expenses
4 step closing process
1-close revenue accs
2-close expense accs
3-close inc summary acc
4-close dividends
post closing trial balance
a list of all permanent accts and their balances after closing entries
current vs long term classification
current- to be collected or owed within 1 year
long term- expected after 1 year
current assets
assets to be sold, collected, or used iwthin one year
ex-prepaid, acc rec
long term investments
assets to be held for more than 1 year
-ex notes rec, stocks
intangiable assets
long term assets that lack physical form
ex- trademarks, patents
current liabilities
liabilities to be paid/settled within 1 ear
ex- accts pay, unearned rec
long term liabilities
liabilities not due within one year
ex- notes payable, motgage payable
new balance sheet layout
ASSETS
-current assets
-long term investments
-plant assets
LIABILITIES
-current liabilities
-long term liabilities
EQUITY
-common stock
-retained earnings
accrued interest formula
principle amt owed X annual interest rate X fraction of year since last payment
steps in the closing process
1- identify accs for closing
2-record and post closing entries
3-prepare a post closing trial balance
what goes in cash vs what goes in accrual
cash
- cash received
-cash paid
-prepaid cash
accrual
-earned
-incurred
accounting cycle in order
1-Analyzing transactions/events
2-Journalizing transactions and events
3-Posting journal entries to the ledger
4-Preparing the unadjusted trial balance
5-Journalizing and posting adjusting entries
6-Preparing the adjusted trial balance
7-Preparing the financial statements
8-Journalizing and posting closing entries
9-Preparing the post-closing trial balance
