Chapter 3 The Adjusting Process Flashcards
what is the difference between cash basis accounting and accrual basis accounting?
cash basis accounting: revenue is recorded only when cash is received and expenses are recorded only when cash is paid (not GAAP, often used by small businesses)
Accrual basis accounting: revenue is recorded when earned and expenses are recorded when incurred
what concepts and principles apply to accrual basis accounting?
the time period concept assumes that a businesses activities can be sliced into small time segments and that financial statements can be prepared for specific periods such as month, quarter, or year
the revenue recognition principle requires companies to record revenue when it has been earned and determines the amount of revenue to record
the matching principle guides accounting for expenses and ensures that all expenses are recorded when they are incurred during the period it then matches those expenses against the revenues of the period
what are adjusting entries and how do we record them?
adjusting entries are completed at the end of the accounting period and record revenues to the period in which they are earned and expenses to the period in which they occur; adj entries also update the asset and liability accounts
what are they four types of adjusting entries?
prepaid expense: Expense DR, Asset CR
Unearned revenue: Liability DR, Revenue CR
Accrued expense: expense DR, Liability CR
Accrued Revenues: Asset DR, Revenue CR
what is the purpose of the adjusted trial balance and how do we prepare it?
an adj trial balance is a list of all the accounts with their adj balances, it ensures that total debits equal total credits
what is the impact of adj entries on the financial statements?
if adjusting entries are not recorded, the balance sheet and income statement accounts will either be overstated or understated. overstating or understating accounts causes the financial statements to be incorrect
how could a worksheet help in preparing adj entries and the adj trial balance?
a worksheet is an internal document that helps identify the accounts that adjustments. In addition a worksheet helps summarize data for the preparation of the financial statements
what is an alternative treatment of recording prepaid expenses and unearned revenues?
prepaid expenses can be recorded to an expense account at the time of payment. the adj entry would transfer any remaining prepayment to the asset account, prepaid expenses
Unearned revenues can be recorded to a revenue account at the time of cash receipt. the adj entry would transfer any remaining liability to the liability account, Unearned revenue.
what is a contra account?
an account that is paired with, and is listed immediately after, its related account in the chart of accounts and associated financial statement, and whose normal balance is the opposite of the normal balance of the related account
what is deferred revenue?
a liability created when a business collects cash from customers in advance of completing a service or delivering a product
what is depreciation?
the process by which businesses spread the allocation of a plant assets cost over its useful life
what is fiscal year?
an accounting year of any twelve consecutive months that may or may not coincide with the calendar year
what is a matching principle?
guides accounting for expenses, ensures that all expenses are recorded when they are incurred during the period, and matches those expenses against the revenues of the period
what is a plant asset?
long-lived, tangible asset, such as land, building, and equipment, used in the operation of a business.
what is residual value?
the expected value of a depreciable asset at the end of its useful life
