Exam 1, Chapters 2, 3, 4 - Concepts Flashcards
List:
Types of Journal Entries
- Daily Journal Entry
2. Adjusting Journal Entries
List:
Steps in the Account Cycle (in order)
- Transaction Analysis
- Journal Entires (?)
- Financial Statement Preparation
Answer:
For each transaction, the analysis should tell you if the transaction ___(a)___ while at the same time ___(b)___, or does it ___(c)___ while at the same time ___(d)___
a. increase asset
b. increase liability
c. increase asset
d. decrease another asset
Answer:
We use a ___(a)___ to practice/perform transaction analysis
a. spreadsheet
Answer:
If you perform services, you earn ______
revenue
Answer:
Revenue is part of your ___(a)__ which is part of your ___(b)___. If you earn revenue it is recorded under the ___(c)___ column of your transaction analysis
a. net income
b. retained earnings
c. revenue
Answer:
Revenue from services performed on account grants you ___(a)___ and it is recorded on the ___(b)___ column of the transaction analysis
a. title to receive cash in the future
b. accounts receivable
Answer:
In transaction analysis, we study the effect of ___(a)___ on ___(b)___
a. each transaction
b. different accounts
Define:
Debit/Credit Model
Anything on the left hand side is an asset and any asset increases your debit. Anything on the right hand side is a liability or shareholder equity and any increase on the right hand side increases your credit.
Answer:
In the debit/credit model you don’t write numbers as ___(a)___ or ___(b)___ because if you debit ___(c)___, there is a/an ___(d)___, and when you credit ___(e)___, there is a/an ___(f)___
a. positive
b. negative
c. any type of asset
d. increase that type of asset
e. a common stock or any type of liability or shareholders’ equity
f. increase in liability or shareholders’ equity
Answer:
Using the debit/credit model: you purchase land for $20,000, what happens with the accounting equation?
You debit land (increase asset - land)
You credit cash with $20,000
Answer:
Using the debit/credit model: What happens when you borrow $9,000 cash from the bank?
You borrowed cash, so cash increases, cash is an asset so you debit $9,000
You borrowed $9,000, which is a notes payable (liability), so you credit $9,000
Define:
Double-entry rule
In the credit/debit model, any action on one side of the equation will have an equal transaction on the other side. These can be increases or decreases - both sides can increase/decrease simultaneously, or one can increase while the other decreases, but the amount will be the same
Any increase in asset you debit
Any decrease in asset you credit
Any increase in liability or equity you credit
Any decrease in liability or equity you debit
Answer:
Using the debit/credit model: What happens when you provide services on account for $8,000
You have an accounts receivable for $8,000, which is an asset, so you debit $8,000
You have service revenue of $8,000, which increases net income, so increase in retained earnings. Retained earnings is part of shareholders’ equity, so you credit $8,000
Answer:
Explain how/why service revenue is something we credit in the credit/debit model
Service revenue increases net income, an increase in net income increases retained earnings, and retained earnings are part of shareholders’ equity, which is on the right side of the equation and is a credit
Answer:
Any revenue increase will increase ___(a)___, so we ___(b)___ according to the double-entry rule
a. shareholders’ equity
b. credit
Answer:
In accordance with the debit/credit model:
Any increase in asset you ___(a)___
Any decrease in asset you ___(b)___
Any increase in liability or equity you ___(c)___
Any decrease in liability or equity you ___(d)___
a. debit
b. credit
c. credit
d. debit
Answer:
Using the debit/credit model: What happens when you pay $5,500 cash for expenses?
Cash decreases $5,500, which is an asset decrease, so we credit cash $5,500
An expense decreases net income, which decreases retained earnings, which decreases stockholders’ equity, so we debit $5,500 (decrease in equity is a debit)
Answer:
Explain why we debit an expense in the debit/credit model
An expense decreases net income, which decreases retained earnings, which decreases stockholders’ equity, so we debit the amount of the expense
Decrease in equity is a debit
Answer:
Using the debit/credit model: You pay dividends to owners
You pay dividends in cash, so cash decreases, cash is an asset, so you credit the decrease in cash
Dividends decrease shareholders’ equity, decrease in equity in amount of dividends paid, so you debit
Answer:
Dividends are a/an ___(a)___, so it is not shown on the ___(b)___, it is not a/an ___(c)___.
a. contra equity
b. income statement
c. expense
Answer:
Why do we debit dividends?
Any dividends will decrease retained earnings, which are part of shareholders’ equity, so equity decreases. Any decrease in equity is a debit
Answer:
Dividends are paid directly ___(a)___ instead of ___(b)___, so it is not included on the ___(c)___
a. out of net income
b. within net income
c. income statement
Answer:
Dividends are a ___(a)___ shareholders’ equity, which will ___(b)___ retained earnings because you only want the ___(c)___
a. decrease in
b. reduce
c. company to pay dividends
Answer:
The double-entry rule says that if anything on the left hand side of the equation increases you ___(a)___, if anything on the right hand side of the equation increases you ___(b)___, which means that any time an asset decreases, you ___(c)___ and any time a liability or equity account decreases, you ___(d)___
a. debit
b. credit
c. credit
d. debit
Define:
Adjusting Journal Entries
Prepared at the end of the accounting period
Not triggered by document flow, so accountants must complete this by the end of the period
Prepared in addition to daily journal entries so we can strictly follow the revenue recognition principle and matching principle
Answer:
Why do we prepare adjusting journal entries in addition to daily journal entries?
So we can strictly follow the revenue reduction principle and the matching principle
Define:
Revenue Recognition Principle
Decides when revenue should be recognized.
It says revenue generally occurs or should be recognized when cash is realized or realizable and when the revenue is earned
Define:
Realized
Realized means that cash is realized - you get cash
Define:
Realizable
You have a reasonable belief or reasonable assurance that you’re going to receive cash in the near future.
It is not realized yet, but will be realized in the future
Define:
Earned
Companies substantially accomplish what it must do to be entitled to the benefit represented by this revenue, which means that you earned it
Answer:
If you earned service revenue, that means you have ______
accomplished all of the services
Answer:
If you want to earn product production revenue, you have to ______
finish the delivery of products to the customer
Answer:
If you want to receive revenue, first it must be ___(a)__, and in terms of cash it could be ___(b)___ or ___(c)___
a. earned
b. realized
c. realizable
Define:
Matching Principle
Says that revenue and expense go together
Let the expense follow the revenue
If you recognize revenue this period, you have to recognize the matched expense in the time period
Answer:
Matching principle is about ___(a)___ and revenue recognition principle is about ___(b)___
a. expense
b. revenue
Answer:
Explain how prepaid insurance is both an asset and an expense
At the time you pre-pay insurance it is an asset because you will enjoy the benefits of the insurance in the future
For each period the insurance covers, the accountant must include the cost of the insurance as an expense
It is an adjusting journal entry
Ex - You pay $120 for 1 year of insurance. When you pay the premium, the pre-paid insurance is an asset. Each month you must account for the $10 expense of the insurance for that month
Answer:
Prepaid insurance is an example of a ______ journal entry
adjusting
Answer:
Explain why prepaid insurance is an adjusting journal entry
It appears on two financial statements that change in unison
It appears on the income statement as an expense (you prepaid $120 for one year, so each month it is shown as a $10 expense)
It appears on the balance sheet as an asset. At the time of prepayment, it is an asset in the amount of $120 (the balance), however this asset decreases by $10 each month in unison with it being shown as an expense on the income statement
Answer:
Explain why deferred revenue is an adjusting journal entry
You receive cash prior to the service or good being provided, so it is unearned revenue and is a liability account
If you receive $300 prepayment for rent for 3 months, so you debit cash $300
Each month covered under the prepayment you debit unearned rent revenue $100 (because liability decreased by $100) and credit rent revenue $100 (balance decreases $100 each month)
List:
Types of Adjusting Journal Entries
- Prepaid Expense
- Deferred Revenue
- Accrued Revenue
- Accrued Expense
Define:
Accrued revenue
You recognize revenue before cash is received
We recognize revenue when cash is not realized, and then when cash is realized in the future, you receive cash
(cash is realizable)
Answer:
Explain how accrued revenue is an adjusting journal entry
You debit cash receivable, which tells people that you earned the cash, but have not yet received it
For example, you invest money with a set interest rate. You debit interest receivable for the amount of interest you expect to receive before it is realized. Once it is realized you debit cash and credit interest receivable
Define:
Accrued Expense
You recognize expenses before you pay cash for them
Answer:
Explain why accrued expense is an adjusting journal entry
You account for the expense as a debit and once it is paid you shift the amount paid as a credit
Example - monthly interest payment on money borrower. You account for all interest that will be owed as an expense debit, as monthly interest payments are made you credit the expense for the amount of interest paid with each payment
