Chapter 3 Flashcards
Accounting cycle definition and what are the steps?
Sequence of activities to accumulate and report financial statements
Analyze-record-adjust-report-close
*steps do not occur with equal frequency
Close the books
End of adjustment process; analyze and record daily transactions throughout period but adjust and report when management requires it- monthly or quarterly but at least annual
Fiscal year
One year accounting period
Calendar year
Fiscal year end Dec 31
Chart of accounts
Titles and numbers of all accounts in general ledger
What are the groups in the chart of accounts?
Asset, liabilities, equity, revenue, expenses
Journal
journalize- record transactions- must have equal debits and credits
Posting
After journal entries are journalized, debits/credits transferred to general ledger
Unadjusted trial balance
Shows account balances before any adjustments are made
Purpose is to be sure general ledger is in balance before management adjusts
When do adjustments occur?
1) at the end of the reporting period, before financial statement construction
2) almost never involve cash
Adjusting entries
Journal entries made to reflect adjustments, usually affects a balance sheet account and income statement account
What are the 4 types of adjustments?
1) deferred revenues
2) deferred (prepaid) expenses
3) accrued revenues
4) accrued expenses
Deferred revenues
Allocate earned portion of performance obligation and contract liabilities earned in the period; companies receive fees for product/service before product/service rendered
As services are performed, revenue is earned and liability decreases
Examples of deferred revenues
Sell gift cards, rental payment rental payments in advance, insurance premium received in advance by insurance company, magazine subscription received by publishers
Deferred/prepaid expenses
Allocating assets to expenses
Added to (debited) an asset account when expenditure occurs- end of accounting period, portion that has expired transferred to expense account
What are examples of deferred/prepaid expenses?
Building, equipment, supplies, prepayments of rent and advertising, insurance premiums covering several periods
Prepaid insurance
Deferred/prepaid expense
Debit asset (payment) when insurance premium advance is paid, adjust to recognize expense
Depreciation
Deferred/prepaid expense
Process of allocating costs of equipment, vehicles, and buildings to the periods benefitting from their use; each period in which assets used must reflect a portion of cost as expense- asset helped generate revenue; period depreciation is an estimate
Straight line depreciation
Assume entire cost of asset is depreciated- zero salvage value
Contra asset
Record depreciation, asset amount not reduced directly- accumulated depreciation labeled XA in journal entries
Contra accounts
Record reductions in or offsets against account
Increase in contra asset decreases net balance of long term assets
Accumulated depreciation
Credit balance and appears in balance sheet as deduction from related asset amount
Book value
Resulting balance (Cost-accumulated depreciation) on expired asset cost to be allocated as expense in future
Accrued revenues
Revenue recognized when company has transferred good/service to customers and amount to which company expects entitled from transfer
Company often provides services or earns income during period that isn’t paid for by clients or billed; properly account for entries made to reflect revenues/income earned not billed or received
Accrued sales revenue
Accrued revenue
Interest income received based on average balance in checking; if accrued in Dec and paid in Jan- earned interest in Jan, interest receivable asset and interest income on income statement
Accrued expenses
Incur expenses before paying (wages, interest, utilities, taxes)- made at regular intervals of time
Accrued wages
Accrued expenses
Employees earn wages in Dec and are paid in Jan; wage expense recorded in income statement in Dec as wages payable; balance sheet would show wages payable liability
Accrued interest
Accrued expenses
Note payable with interest over 3 years record interest expense and recognize liability
Accrued income tax
Accrued expenses
pay tax based on how much it earns tax expense/taxes payable
Adjusted trial balance
All ledge account balances after adjustments
What order are the statements prepared in for the accounting cycle?
1) income statement
2) statement of stockholders equity
3) balance sheet
4) statement of cash flows
What is in an income statement?
revenues and expenses
What is in statement of stockholders equity?
Events causing equity components to change during accounting period
What are the sources of the items in stockholders equity?
- Common stock account in general ledger provides balance at the beginning and issuances over the period
- Net income comes from income statement
- Dividends during the period are retained earnings from adjusted trial balance
What is in a balance sheet?
Assets, liabilities, equity
What are the sources of the items in balance sheet?
- Assets and liabilities come from the adjusted trial balance
- Common stock and retained earnings come from statement of stockholders equity
What is in the statement of cash flows?
Inflows and outflows of activities
What are the 3 activities in a statement of cash flows?
- Cash flows from operating activities: transactions/events for primary operating
- Cash flows from investing activities: acquisitions of investments and long term assets
- Cash flows from financing activities: issuance of and payments toward equity, borrowings, long term liabilities
Are you better off if you have an increase in cash in your statement of cash flows?
Not necessarily- need to look at the reason for the change
Temporary accounts
Set balance to zero for the next period, end of period values do not carry over
Income statement is only relevant for that period then needs to be closed
What statement has temporary accounts?
Income statement (revenue/expense)
Permanent accounts
End of period balance is beginning of period balance for next period
Balance sheet balances carry over for the next period
What statement has permanent accounts?
Balance sheet
Closing process
End of period balance in temp account moves to permanent account of retained earnings
What account do temporary accounts move to in the permanent account?
Retained earnings
What is the process for closing accounts?
Temp account is closed when entry is made that makes the balance zero, entry is equal in amount to account’s balance but opposite the balance as a debit or credit; transfers the balance of one account to another then temp account is ready to accumulate data again
Close revenue accounts
Debit each revenue for amount equal to balance, credit retained earnings for total
Close expense accounts
Credit each expense for amount equal to balance, debit retained earnings for total of expenses
Post closing trial balance
Evidence that equality of debits and credits maintained in general ledger throughout adjusting/closing period, general ledger in balance for next period
- only balance sheet accounts appear in post-closing trial balance
- all income statement accounts have 0 balance
What happens to balance sheet accounts in post-closing trial balance?
Only balance sheet accounts appear in post-closing trial balance
What happens to income statement accounts in post-closing trial balance?
All accounts have 0 balance
How is ‘analyze’ defined in the accounting cycle?
What # is it in the order of the accounting cycle?
Analyze transactions from source documents
Step 1
How is ‘record’ defined in the accounting cycle?
What # is it in the order of the accounting cycle?
Journalize transactions and prepare unadjusted trial balance
Step 2
How is ‘adjust’ defined in the accounting cycle?
What # is it in the order of the accounting cycle?
Journalize adjusting entries and prep adjusted trial balance
Step 3
How is ‘report’ defined in the accounting cycle?
What # is it in the order of the accounting cycle?
Prepare financial statements
Step 4
How is ‘close’ defined in the accounting cycle?
What # is it in the order of the accounting cycle?
Journalize closing entries and prepare post closing trial balance
Step 5
