Chapter 4 Flashcards
Accrual basis accounting
Transactions that change a company’s financial statements are recorded in the periods which the events occur, even if cash was not exchanged
Cash basis accounting
Companies record revenue at the time they receive cash-not in accordance with GAAP
Adjusting entries
Ensures that the revenue recognition and expense recognition principles are followed - necessary because the trial balance may mot be complete or up to date
Why could the trial balance not be complete or up to date?
Some events are not recorded daily because its not efficient to do so
Some costs are not recorded during the accounting period because these costs expire with the passage of time
Some items may not be recorded
Types of adjusting entries
Deferrals ( prepaid expenses, unearned revenues) and accruals (accrued revenues, accrued expenses)
Prepaid expenses
Expenses paid in cash before they are used or consumed
Unearned revenues
Cash received before services are performed
Accrued revenues
Revenue services performed but not yet received in cash or recorded
Accrued expenses
Expenses incurred but not yet paid in cash or recorded
An adjusting entry for prepaid expenses
Increase (a debit) to an expense account
Decrease (a credit) to an asset account
Types of prepaid expenses
Supplies (increase, a debit, to an asset account)
Insurance (an increase, a debit, in the asset account prepaid insurance)
Depreciation (
Book value
The difference btw the cost of any depreciable asset snd its related accumulated depreciation
Unearned revenues adjusting entry
Decrease (debit) to a liability account and increase (credit) to a revenue account
Accrued revenues adjusting entry
Increase (debit) to an asset account and increase (credit) a revenue account
Accrued expenses adjusting entry
Increase (debit) to an expense account and increase (credit) to a liability account
Earnings management
The planned timing of revenues, expenses, gains, and losses to smooth out bumps in the net income
Quality of earnings
Indicates the level of full and transparent info that a company provides to users of its financial statements
Ways to manage earnings
One time items: non-recurring
Inflate revenue: done in short run
Improper adjusting entries
Temporary accounts
Revenue, expense, and dividend accounts whose balances a company transfers to retained earnings at the end of an accounting period (aka nominal)
Permanent accounts
Balance sheet accounts whose balances are carried forward to the next accounting period -> assets, liabilities, stockholders’ equity (aka real) NOT CLOSED
Closing entries
Entries at the end of an accounting period to transfer the balances of temporary accounts to a permanent stockholders equity account, retained earnings
Provide a zero balance in each temporary account
Income summary
A temporary account used in closing revenue and expense accounts
Post closing trial balance
A list of permanent accounts and their balances after a company has journalized and posted closing entries
Worksheet
A multiple column form that may be used in the adjustment process and in preparing financial statements (not a permanent accounting record)
