Chapter 3: Adjusting the Accounts

Question 1

Time Period Assumption

Answer 1

Accountants divide the econmoic life of a buisness into artifical time periods

• month, quarter, year

Question 2

Interim Periods

Answer 2

Monthly/Quartlery time Periods

Question 3

Fiscal Year

Answer 3

Accounting time period that is one year in length

Question 4

Calender Year

Answer 4

Januar 1 to December 31

Question 5

Time Periods in the EU for capital market oriented firms

Answer 5

• MUST prepare half year and annual financial statements
  *

Question 6

Time Periods in the US

Answer 6

Most public companies must prepare both

• quarterly and
• annual

​financial statements

Question 7

Accrual Basis Accounting

Answer 7

• Transaction recorded in the period in which the events occur
• Revenues are recognized when the services are performed NOT when cash is received
• Expenses are matched to revenues

UNGLEICH “ Cash-Basis Accounting”

Question 8

Cash Basis Accounting

Answer 8

• Revenues are recognized only when cash is received
• Expenses – only when cash is paid
• NOT in accordance with IFRS

Question 9

Revenue Recognition Principle

Answer 9

Recognize revenue in the accounting period in which the performance obligation is satisfied

• In a service enterprise, revenue is considered to be earned at the time the service is performed

Question 10

Expense Recognition Principle

Answer 10

• Principle/Assumption dictating that expenses should be recognized when assets are used up or a liabilities are incurred to generate revenue

Match expenses with revenues !!!

Question 11

Adjusting Entries

Answer 11

• Required EVERY TIME a company prepares fnancial statements.
• Ensures that the revenue/expense recognition principles are followed
• Necessay because Trial balance my not contain up-to-date and complete data
• EVERY adjusting Entry will include:
  
  • one income statement account and
  • one statement of financial position account

Question 12

Deferrals vs. Accruals

Answer 12

Question 13

Deferrals

Answer 13

1. Prepaid Expenses

• Asset
• Expenses paid in cash before they are used/consumed

2. Unearned Revenues:

• Liability
• Cash received before services are performed

Question 14

Accruals

Answer 14

1. Accrued Revenues

• Assets
• Revenues for services performed but not yet received in cash or recorded

2. Accrued Expenses

• Liability
• Expenses incurred but not yet paid in cash or recorded

Question 15

Prepaid Expenses

Answer 15

• Deferral
• ASSET
• CASH PAYMENT before EXPENSES RECORDED
• Expire either with the passage of time or through use

Example:

• Insurance
• Supplies
• Advertising
• rent
• equipment
• buildings

Question 16

Accumulated Depreciation

Answer 16

• Called a Contra Asset Account
• Apperas just after the account is offsets on the statement of financial position

Depreciation expense

to Accumulated Depreciation

Question 17

Unearned Revenues

Answer 17

• Liability
• Receipt of Cash that is recorded as a liability because service has not be performed
• CASH RECEIPT before REVENUE RECORDED
• Example:
  
  • Rent
  • Airline tickets
  • Magazine subscriptions
  • Customer deposits

Question 18

Accrued Revenues

Answer 18

• Accrual, Asset
• Revenues for services performed but not yet received in cash or recorded
• REVENUE RECORDED before CASH RECEIPT
• Bsp.
  
  • Interest
  • Rent
  • Services performed

Question 19

Accrued Expenses

Answer 19

• Accrual, (Liability Account)
• Expenses inccured but not yet paid in cash or recorded
• EXPENSES RECORDED before CASH PAYMENT
• Bsp
  
  • Rent
  • Interest
  • Taxes
  • Salaries

Question 20

Adjusted Trial Balance

Answer 20

• Prepared after all adjusting entries are journalized and posted
• Purpose is to prove the equality of debit balances and credit balances in the ledger
• Is the primary basis for the preparation of financial statments

Question 21

Preparing Financial Statments

Answer 21

Prepared directly from the Adjusted Trial Balance

Question 22

Adjustment for prepaid expenses

decrease and increase what?

Answer 22

Decrease: Assets

Increase: Expenses

Question 23

“Payable”

Answer 23

Verbindlichkeit

-> Accruals

Question 24

Adujusting Entries and the Cash Account

Answer 24

Should NOT be involved