Chapter 3 Adjusting Accounts

Question 1

What are the 2 accounting periods?

Answer 1

1. Calendar year- 12 months > Jan 1-Dec 31
2. Fiscal year- 12 consecutive months ending on any month end other than Dec 31
   -use based on “natural business year end”
   ex. school districts use july 1-june 30

Question 2

What are the 2 accounting methods?

Answer 2

1. Cash method- record journal entry when cash is actually received or paid
   -easier
2. Accrual method- record journal entry when revenue is earned or the expense is incurred
   -GAAP requires businesses to use the accrual method because it better makes revenue with expenses in the current period

Question 3

What are the 2 GAAP principles?

Answer 3

1. Revenue Recognition Principle- recognize revenue when the good or service is provided for a known amount
2. Expense Recognition Principle- “Matching Principle”
   -record the expense in the same period the associated revenue is recorded

Question 4

What are the 2 types of adjustments?

Answer 4

1. Deferrals- paid or received cash BEFORE the expense or revenue is recognized
2. Accruals- paid or received cash AFTER the expense or revenue is recognized

Question 5

What are Adjusted Journal Entries or AJEs?

Answer 5

-booked at the end of an accounting period or when a significant event takes place mid year
-purpose is to “true up” our accounting books (records)
-“Adjusts”/corrects them
-impact any account on the BS or IS EXCEPT CASH!!

Question 6

What is defferal of expense?

Answer 6

-assets paid in advance > “Prepaid expenses”
-as the asset (prep exp) is used up it becomes an actual expense

Question 7

What is depreciation

Answer 7

-Plant or fixed assets
-long term assets
-used in your business to produce and sell goods/services
-wear down, decay, and/or become less useful as time goes on
ex: automobiles, machines, computers, buildings, and furiture
**land is NOT depreciable
-yearly expense of the cost of the asset over its useful life
-set given number of years that you depreciate an asset over

Question 8

What is depreciation expense?

Answer 8

-Equity
-NB=DB
-Represents only the current year

Question 9

What is accumulated depreciation?

Answer 9

-Asset
-NB=CR (“contra” account)
-Represents the current depreciation and all prior year depreciation

Question 10

What is deferral of revenues?

Answer 10

-“unearned revenue”- cash received in advance but good or service is not yet provided
-liability
-NB=CR
-As good or service is provided, the liability becomes a revenue

Question 11

What are accrued expenses?

Answer 11

-costs that are incurred in a period that are BOTH unpaid and unrecorded

Question 12

What is accrued interest?

Answer 12

-Money earned or paid on borrowed money
-Loan/”note”

Question 13

What are accrued revenues?

Answer 13

-Revenue earned in a period, but has not yet been recorded or received in cash
ex: mechanic, electrician

Question 14

What is a trial balance?

Answer 14

-lists all accounts and their debit/credit balances
-used the adjusted TB numbers to create our 4 FS: 1. income statement 2. statement of RE 3. balance sheet 4. statement of cf

Question 15

What are closing entries?

Answer 15

-close temporary account balances to $0 at the end of the accounting cycle

Question 16

What are temporary accounts?

Answer 16

-close to $0 at the end of the year
-beginning of every year starts with a $0 balance
Ex: revenues, expenses, dividends
-represents only the current year
-close to retained earnings

Question 17

What are permanent accounts?

Answer 17

-balance carries forward
ex: assets, liabilities, and common stock