Chapter 4 Flashcards
True or False: Accounting systems are designed to record most recurring daily transactions, particularly any involving cash. However, cash is not always received or paid in the period in which the company earns the related revenue or incurs the related expense.
True
Why are adjustments needed?
Adjustments are made to the accounting records at the end of the period to state assets, liabilities, revenues, and expenses at appropriate amounts.
Income Statements
(1) Revenues are recorded when earned
(2) Expenses are recorded in the same period as the revenues to which they relate.
Balance Sheet
(1) Assets are reported at amounts representing the economic benefits that remain at the end of the period.
(2) Liabilities are reported at amounts owed at the end of the period.
An expense or revenue has been deferred if we have postponed reporting it on the income statement until a later period.
Deferral Adjustments
Deferral adjustments are used to _____ balance sheet accounts and ____ corresponding income statements.
(1) decrease
(2) increase
True or False: Each deferral adjustment involves one asset and one expense account, or one liability and one revenue account.
True
Are needed when a company has earned revenue or incurred an expense in the current period but has not yet recorded it because the related cash will not be received or paid until a later period.
Accrual Adjustments
Accrual adjustments are used to record revenue or expenses when they occur _______ to receiving or paying cash, and to ____ corresponding balance sheet accounts.
(1) Prior
(2) Adjust
True or False: Each accrual adjustment involves one asset and one revenue account, or one liability and one expense account.
True
Adjustments are ______ on a daily basis because it’s more efficient to do them all at once at the end of each period.
Not made
Determine the necessary adjustments to make the accounting records.
Analyze
Adjusting journal entries ____ involve cash.
Never
Adjusting entries ____ include on balance sheet and ____ income statement account
(1) One
(2) One
Closing Temporary Accounts
(1) Transfer Net Income and Dividends to Retained Earnings
(2) Establish zero balances in all income statement and dividend accounts.
What do temporary accounts track?
Financial results for a limited period of time.
What do permanent accounts track?
Financial results from year to year.
Closing Journal Entries Needed:
(1) Debit revenues account and credit expense accounts. Debit or credit the difference to Retained Earnings.
(2) Credit Dividends Declared and debit Retained Earning
After posting these closing entries, all the income statement accounts and the dividends will have a balance of _____.
Zero
Post Closing Trial Balance Steps
(1) Final Check that all debits still equal credits and that all temporary accounts have been closed.
(2) Contains balances for only permanent accounts
(3) Is the last step in the accounting process
Adjustments help to ensure that all revenues and expenses are reported in the ______________.
Period in which they are earned and incurred
True or False: Without adjustments, the financial statements present an incomplete and misleading picture of the company’s financial performance.
True
