chapter 4 (simplified)_ Flashcards
What is accrual accounting?
It’s when you record money when it’s earned or used, not when cash moves.
Why use accrual accounting?
It gives a clearer picture of a business’s actual finances.
When do you record revenue?
When the work is done or the product is delivered, not when paid.
When do you record expenses?
When you use something, not when you pay for it.
Why isn’t cash basis accounting used?
It can give a false sense of profits or losses.
What is revenue?
Money earned from selling products or services.
When does a store record revenue?
When the product is sold and given to the customer.
When does a service business record revenue?
When the service is completed.
How do you recognize revenue under ASPE?
When work is mostly done, revenue can be measured, and payment is likely.
How do you recognize revenue under IFRS?
Follow 5 steps: contract, obligations, price, allocate, and recognize.
What are adjusting entries?
Entries made at the end of a period to keep records accurate.
Why do we need adjusting entries?
To fix accounts so they reflect what was really earned or used.
What two types of accounts do adjusting entries always involve?
One income statement account and one balance sheet account.
When do we make adjusting entries?
At the end of an accounting period.
What are the two main types of adjusting entries?
Prepayments and accruals.
What are prepayments?
Paying for something before using it, like prepaid rent.
How do you record a prepayment?
Dr. Prepaid Expense, Cr. Cash.
How do you adjust a prepayment?
Dr. Expense, Cr. Prepaid Expense.
What is deferred revenue?
Money received before the work is done.
How do you record deferred revenue?
Dr. Cash, Cr. Deferred Revenue.
How do you adjust deferred revenue?
Dr. Deferred Revenue, Cr. Revenue.
What are accrued revenues?
Revenue earned but not yet paid or recorded.
How do you record accrued revenue?
Dr. Accounts Receivable, Cr. Revenue.
What do you do when an accrued revenue is collected?
Dr. Cash, Cr. Accounts Receivable.
What are accrued expenses?
Expenses used but not yet paid or recorded.
How do you record accrued expenses?
Dr. Expense, Cr. Accounts Payable.
How do you pay off an accrued expense?
Dr. Accounts Payable, Cr. Cash.
What accounts are used for specific accruals?
Interest Payable, Salaries Payable, and Taxes Payable.
What is an adjusted trial balance?
A final check to make sure debits = credits after adjustments.
Why is an adjusted trial balance important?
It’s used to prepare financial statements.
What are closing entries?
They clear out temporary accounts to reset for the new period.
Which accounts are closed at the end of the period?
Revenue, expense, and dividends accounts.
Which accounts stay open?
Assets, liabilities, and equity accounts.
Why do we make closing entries?
To move net income into retained earnings and start fresh.
