Chapter 3 - Adjusting Accounts for Financial Statements Flashcards
________ basis accounting records revenues when services and products are delivered and records expenses when incurred
Accrual
________ basis accounting records revenues when cash is received and records expenses when cash is paid.
Cash
________ basis accounting increases the comparability of financial statements from period to period.
Accrual
Four types of adjustments for transactions and events that extend over more than one period
1- Deferral of expense
2- Deferral of revenue
3- Accrued expense
4- Accrued revenue
Prepaid expenses
assets paid for in advance of receiving their benefit
Prepaid insurance
expires with time. As time passes, the benefits of the insurance gradually expire and a portion of the Prepaid insurance asset becomes expense.
Depreciation
the allocation of the costs of assets over their expected useful lives
4 types of deferrals of expense
1- Prepaid Insurance
2- Prepaid Rent
3- Depreciation
4- Supplies
Unearned revenue
LIABILITY
cash received in advance of providing products and services.
Accrued expenses
costs that are incurred in a period that are both unpaid and unrecorded.
Ex: Accrued salary expense
Adjusted trial balance
a list of accounts and balances after adjusting entries have been recorded and posted to the ledger.
Accrued revenue
revenues earned in a period that are both unrecorded and not yet received
Ex: A technician who bills customers after a job is done. If one-third of a job is complete by the end of a period, then the technician must record one-third of the expected billing as revenue.
In what order are financial statements prepared?
1- Income Statement
2- Statement of Retained Earnings
3- Balance Sheet
What are the temporary accounts?
Accounts relating to one accounting period and closed at the end of the period:
- revenues
- expenses
- dividends
- income summary
What are the permanent accounts?
Accounts that report on activities related to one or more future accounting periods:
- assets
- liabilities
- common stock
- retained earnings
Closing entries
entries that transfer the end-of-period balances in revenue, expenses, and dividends accounts to the permanent Retained Earnings account
Accounting Cycle
1- Analyze transactions 2- Journal 3- Post 4- Prepare unadjusted trial balance 5. Adjust and post accounts 6- Prepare adjusted trial balance 7- Prepare financial statements 8- Close accounts 9- Prepare post-closing trial balance
___________ organizes assets and liabilities into subgroups.
Classified balance sheet
Operating Cycle
the time span from when cash is used to acquire goods and services until cash is received from the sale of goods and services
Categories in a classified balance sheet
Assets: Current, Noncurrent (Long-term investments, plant assets, intangible assets)
Liabilities and Equity: Current, Noncurrent, Equity
Current ratio
a measure of a company’s ability to pay its short-term obligations.
Current ratio = Current Assets / Current Liabilities
Post-closing trial balance
a list of permanent accounts and their balances after all closing entries.
It verifies that
1) total debits equal total credits for permanent accounts and
2) all temporary accounts have zero balances
