chapter 4 Flashcards
What is the accrual basis of accounting?
Transactions are recorded in the period they occur, not when cash is received or paid.
Why is accrual basis accounting important?
It provides regular, timely, and accurate financial information.
How is revenue recognized under accrual accounting?
Revenue is recorded when earned, rather than when cash is received.
How are expenses recognized under accrual accounting?
Expenses are recorded when goods or services are used or consumed, not when cash is paid.
Why is cash basis accounting not allowed for reporting purposes?
It can lead to misleading information for decision-making.
What is revenue?
An increase in assets (or settlement of liabilities) resulting from a company’s ordinary activities.
When is revenue recognized in a merchandising company?
When merchandise is sold and delivered (point of sale).
When is revenue recognized in a service company?
When the service is performed.
What are the three conditions for revenue recognition under ASPE?
- Performance is substantially complete
- Revenue is reliably measurable
- Collection is reasonably certain.
What is the five-step process for revenue recognition under IFRS?
Identify the contract, identify performance obligations, determine the transaction price, allocate the price, recognize revenue when obligations are met.
When are expenses recognized?
When a decrease in economic resources occurs (assets consumed or liabilities incurred).
What is the matching principle?
Expenses should be recognized in the period in which they help generate revenue.
What are adjusting entries?
Entries made at the end of an accounting period to update account balances.
Why are adjusting entries necessary?
Because the trial balance may not contain complete and up-to-date data.
What are the two main types of adjusting entries?
Prepayments and accruals.
What are prepayments?
Payments made in advance for expenses that will be used in the future.
How are prepaid expenses recorded initially?
Dr. Prepaid Expense, Cr. Cash.
How is a prepaid expense adjusted?
Dr. Expense, Cr. Prepaid Expense.
What is deferred revenue?
Revenue received in advance for services or goods yet to be provided.
How is deferred revenue recorded initially?
Dr. Cash, Cr. Deferred Revenue.
How is deferred revenue adjusted?
Dr. Deferred Revenue, Cr. Revenue.
What are accruals?
Revenues earned or expenses incurred that have not yet been recorded.
What are accrued expenses?
Expenses that have been incurred but not yet recorded or paid.
How are accrued expenses recorded?
Dr. Expense, Cr. Accounts Payable.
What are accrued revenues?
Revenues earned but not yet received or recorded.
How are accrued revenues recorded?
Dr. Accounts Receivable, Cr. Revenue.
What is an adjusted trial balance?
A trial balance prepared after adjusting entries to ensure debits equal credits.
Why is an adjusted trial balance important?
It is used to prepare financial statements.
What are closing entries?
Entries made to close temporary accounts (revenues, expenses, dividends) and update Retained Earnings.
Which accounts are closed at the end of the period?
Revenue, expense, and dividend accounts.
Which accounts are permanent and not closed?
Assets, liabilities, and equity accounts.
What is the purpose of a post-closing trial balance?
To verify that all temporary accounts have been closed and total debits equal credits.
Why are adjusting entries necessary?
They ensure transactions are recorded in the correct accounting period.
Do adjusting entries ever involve cash?
No, cash transactions are recorded when they occur, and adjusting entries do not include cash.
What two types of accounts do adjusting entries always involve?
One Statement of Income account and one Statement of Financial Position account.
When are adjusting entries recorded?
At the end of the accounting period.
What are prepayments made?
Payments for items in advance before receiving the benefit, such as prepaid insurance or rent.
What is the original entry for prepayments made?
Dr. Prepaid Expense (asset), Cr. Cash.
How are prepayments adjusted?
Dr. Expense, Cr. Prepaid Expense.
What are prepayments received?
Cash received in advance for work or goods not yet delivered, recorded as Deferred Revenue.
What is the original entry for prepayments received?
Dr. Cash, Cr. Deferred Revenue (liability).
How are prepayments received adjusted?
Dr. Deferred Revenue, Cr. Revenue.
What are accrued revenues?
Revenues earned but not yet received or recorded.
How are accrued revenues recorded?
Dr. Accounts Receivable, Cr. Revenue.
What is the journal entry when cash is collected for accrued revenue?
Dr. Cash, Cr. Accounts Receivable.
What are accrued expenses?
Expenses incurred in a period but not yet recorded.
How are accrued expenses recorded?
Dr. Expense, Cr. Accounts Payable.
How is an accrued expense settled when paid?
Dr. Accounts Payable, Cr. Cash.
What accounts are used for specific accruals?
Interest Payable, Salaries Payable, Income Tax Payable for their respective expenses.
