Chapter 3 Flashcards
Notes Payable
- Written promissory note
- Lender gives borrower specific amount, borrower promises to pay it back with interest over period
Accrual Basis
- Events recorded when they occur, not when the cash is received
- Expenses are recorded when services and goods are used to generate revenue
Revenue Recognition
When there is an increase in assets or decrease in liabilities as a result of business activities with customers
- Generally when service is performed or when goods are sold and delivered
Expense Recognition
- Expenses are a decrease in OE
- Tied to revenue recognition when direct association exists between costs incurred and earning of revenue
Why adjusting entries are necessary
- To adjust account balances that are incorrect because of passage of time
- To match revenues and expenses in correct time period
-Ex. Late invoices, bank statements
When are adjusting entries recorded
- End of fiscal year
- Recorded on same date of end-of-year balance sheet
-First recorded on the worksheet then journalized and posted.
What can adjusting entries be classified as?
- Prepayments
- Accruals
Prepaid expenses
Costs paid and recorded as assets before they are used
Amortization and accumulation
Allocation of cost of a long-lived asset to expense its useful life
Unearned Revenue
Cash received and recorded as liabilities before earned
Accrued revenues
- Required where items are not yet recorded in the accounts
- Until adjustment is made, the revenue account and asset account is understated
Accrued expenses
Required where items are not yet recorded in the accounts
- Until adjustment is made, the expense account and liability account is understated
- Expense incurred but not yet recorded is a liability tied to payables
Straight line method
Annual dep = (cost of asset - residual value) \ useful life
Declining balance method
Book value = Cost of asset - accumulated dep
