Chapter 3 - The Accounting Information System Flashcards
Why do companies make adjusting entries
Ensure the company follows the revenue recognition and expense recognition principles
Makes it possible to report proper amounts on the balance sheet and income statement for the accounting period
What are the four different types of adjusting entries?
Deferrals:
Prepaid expenses
Unearned revenues
Accruals:
Accrued revenues
Accrued expenses
What is the adjusting entry for prepaid expenses?
Debit to expense account, credit to asset account
When adjusting for depreciation, why is a contra asset account used?
A contra asset account offsets an asset account on the balance sheet. This means that the Accumulated Depreciation - Equipment account offsets the Equipment account on the balance sheet. Its normal balance is a credit. Companies use this account instead of crediting Equipment in order to disclose both the original cost of the equipment and the total expired cost to date.
What is an adjusting entry to record periodic depreciation?
Debit to Depreciation Expense
Credit to Accumulated Depreciation (contra asset)
What is the adjusting entry for unearned revenue?
A debit (decrease) to a liability account
A credit (increase) to a revenue account
Records the revenue for services performed during the period and to show the liability (unearned revenue) that remains at the end of the period.
Define Accrued Revenues
Revenues for services performed but not yet recorded at the statement date.
Ex. accrued revenues may accumulate with the passing of time, as in the case of interest revenue. These are unrecorded because the earning of interest does not involve daily transactions.
Ex. accrued revenues also may result from services that have been performed but not yet billed nor collected, as in the case of commissions and fees. These may be unrecorded because only a portion of the total service has been performed and the clients will not be billed until the service has been completed.
What is the adjusting entry for accrued revenues?
A debit (increase) to an asset account
A credit (increase) to a revenue account
What is the adjusting entry for accrued expenses?
A debit (increase) to an expense account
A credit (increase) to a liability account
What is the adjusting entry to record periodic bad debt expense?
Debit to Bad Debt Expense
Credit to Allowance for Doubtful Accounts
What are the closing entries made at the end of an annual accounting period?
Close out revenue and expense account balances to a clearing or suspense account called Income Summary. This account represents the net income or net loss for the period. It is then transferred to a stockholders’ equity account (corp = retained earnings; proprietorships and partnerships = a capital account)
Close out dividends to retained earnings/capital account. Dividends are not closed through the Income Summary account because dividends are not expenses and they are not a factor in determining net income.
What is the difference between a trial balance, an adjusted trial balance, and a post-closing trial balance.
Trial Balance - prepared after entering the regular transactions of the period
Adjusted Trial Balance - prepared after posting the adjusting entries
Post-Closing Trial Balance - prepared after posting the closing entries
What are the temporary accounts (accounts reduced to zero via closing entries)?
Revenue
Expenses
Income Summary
Dividends
