Kimmel Chapter 4 (Accrual Accounting Concepts) Flashcards
Entry during the period:
Deferred Revenue
- DR Cash
- CR Unearned Revenue
Adjusting Entry:
Deferred Revenue
- DR Unearned Revenue
- CR Revenue
Entry during the period:
Deferred Expense
- DR Asset
- CR Cash or A/P
Adjusting Entry:
Deferred Expense
- DR Expense
- CR Asset
Entry during the period:
Accrued Revenue
No Entry
Adjusting Entry:
Accrued Revenue
- DR Asset
- CR Revenue
Entry during the period:
Accrued Expense
No Entry
Adjusting Entry:
Accrued Expense
- DR Expense
- CR Liability
Describe:
Accrual Basis of Accounting
Revenues are recognized when they are earned and expenses are recognized when they are incurred
Describe:
Cash Basis of Accounting
Revenues are recognized when cash is received and expenses are recognized when cash is paid
Under ASPE:
Revenue Recognition
- The services have been provided or the risks and erwards of ownership of the goods have been transferred to the buyer
- The amount of revenue must be able to be reliably measured
- Collection is reasonably assured
Why are adjusting entries necessary?
- Events may not be recorded daily (ex. Use of supplies, earning of salaries)
- Costs that are incurred with passage of time (ex. Rent, insurance, depreciation)
- Not recorded due to unknown amounts (ex. Utility service bill)
Define:
Prepaid Expenses
Expenses paid in cash and recorded as assets before they are used
Define:
Deferred Revenues
Cash received and recorded as liabilities before revenue is earned
Define:
Accrued Expenses
Expenses incurred for which cash has yet to be paid and that have yet to be recorded through journal entries
Define:
Accrued Revenues
Revenues earned for which cash has yet to be received and that have yet to be recorded through journal entries
What are the two categories that adjusting entries can be classified into?
- Prepayments (prepaid expenses, deferred revenues)
- Accruals (accrued expenses, accrued revenues)
What are examples of prepaid expenses?
- Insurance
- Supplies
- Depreciation
- Advertising
- Rent
What are examples of deferred revenues?
- Rent
- Magazine subscriptions
- Customer deposits for future service
- Gift cards
All received in advance
What are accrued expenses also known as?
Accrued payables or Accrued liabilities
What are examples of accrued expenses?
- Interest
- Salaries
- Income tax
Incurred, but not recorded or paid for
What are examples of accrued revenues?
- Interest and services performed
Not yet billed and for which no cash has been received
Describe:
Assets, Liabilites, and SE
before adjustment for:
* Prepaid expenses
- Assets: Overstated
- Liabilities: Normal
- SE: Overstated
Describe:
Assets, Liabilites, and SE
before adjustment for:
* Deferred revenues
- Assets: Normal
- Liabilities: Overstated
- SE: Understated
