Lesson 4 (Adjusting and Closing Process)

Question 1

Revenues are recorded in the period ?

Answer 1

earned
*regardless as to when cash is received or paid

Question 2

Expenses are recognized in the period ?

Answer 2

Incurred
*regardless as to when cash is received or paid

Question 3

What is this ?
are journal entries made at the end of an accounting period (end of year, end of month) to update account balances

Answer 3

adjusting entries

Question 4

What are the two main categories of adjustments ?

Answer 4

1. Defferals
2. Accruals

Question 5

What is this ?
Transactions for which cash has been received or paid while the related revenue or expense has not been recorded (exchange of cash has occurred before the action.)

Answer 5

Deferrals

Question 6

What is this ?
Transactions for which cash has not yet been received or paid, but the related revenue or expense has been earned or incurred and thus must be recorded. (action has occurred before the exchange of cash.)

Answer 6

Accruals

Question 7

What is this ?
Company pays for an expense item in advance.
This pre-payment is recorded as an asset.
It only becomes an expense when the asset… is ‘used up’. Ex: prepaid insurance and rent, supplies

Answer 7

Deferred expenses (prepaid expenses)

Question 8

When purchased, supplies are classified as an asset, specifically a current asset. However, once they are ‘used up’ in the course of business, they are considered an ?

Answer 8

expense

Question 9

What is this ?
Company receives cash in advance for services to be performed or goods to be delivered late.
This cash received is recorded as a liability
It only becomes a revenue when it is earned, when the company performs the service or delivers the good

Answer 9

Deferred Revenues (Unearned revenue)

Question 10

The adjusting entry for deferred (unearned revenues) results in a debit to ____ and a credit to ___ ?

Answer 10

Debit to a liability account
Credit to a revenue

Question 11

Unearned revenue is classified as ____ and appears on the balance sheet ?

Answer 11

liability
*is not classified as a revenue account and thus does not effect net income

Question 12

The adjusting entry for deferred (prepaid) expenses results in a debit to _____ and a credit to _____ ?

Answer 12

Debit to an expense account
Credit to an asset account

Question 13

adjusting entries for deferred (prepaid) expenses are required to record the portion of the payment representing the expense incurred which is the amount of the asset ?

Answer 13

Used up

Question 14

Adjusting entries for deferred (unearned) revenues are required to record the portion of the liability that represents the ?

Answer 14

revenue earned in the current period

Question 15

What is this ?
Revenues earned by not yet received in cash or recorded Ex: sales of merchandise on account

Answer 15

Accrued revenues

Question 16

What is this ?
Expenses incurred but not yet paid in cash or recorded Ex: salaries incurred by not yet paid for

Answer 16

Accrued expenses

Question 17

Adjusting entries for accruals are required to record _____ and ______ in the current period but not yet received or paid in cash ?

Answer 17

record revenues earned and expenses incurred

Question 18

For an accrued revenue you debit ____ and credit ____ ?

Answer 18

debit an asset account
credit a revenue account

Question 19

For an accrued expenses you debit ____ and credit ____ ?

Answer 19

debit and expense account
credit a liability account

Question 20

What is this ?
The systematic allocation of the cost of a plant asset (buildings and equipment) to expense over its useful life.
the using up of buildings and equipment

Answer 20

Depreciation

Question 21

Depreciation has absolutely nothing to do with the value of an ?

Answer 21

asset

Question 22

To record depreciation expense, debit ____ and credit ____ ?

Answer 22

debit depreciation expense
credit accumulated depreciation

Question 23

What is this ?
*classifies as an expense account
*found on the income statement
*reduces net income
*represents the amount of the building or equipment ‘used up’ in the current year

Answer 23

Depreciation expense

Question 24

What is this ?
*causes a decrease in assets
*classified as a contra asset account
*normal balance is a credit
*found on the balance sheet directly underneath the asset being depreciated
*represents the total amount of the building or equipment used up since it was acquired by the company

Answer 24

Accumulated depreciation

Question 25

Accumulated depreciation is a ?

Answer 25

Contra asset account
meaning it results in a reduction of assets

Question 26

What is this equation for ?
(Cost - Residual Value) / Useful life = ?

Answer 26

Calculating annual depreciation expense

Question 27

What is this ?
represents the company’s estimate of what the asset can be sold for at the end of its expected life

Answer 27

Residual value

Question 28

Useful life is expressed in ?

Answer 28

years

Question 29

Is depreciation an example of an accrual or a deferral ?

Answer 29

deferral.
the cash is paid first when the asset is purchased. the expense is recorded later as the asset gets used up

Question 30

What is this ?
comes about when a company either borrows money and must repay it with interest (interest expense) or when a company lends money to someone and is to be repaid with interest (interest revenue)

Answer 30

Interest

Question 31

What is this ?
when a company either borrows money and must repay it with interest

Answer 31

interest expense

Question 32

What is this ?
when a company lends money to someone and is to be repaid with interest

Answer 32

interest revenue

Question 33

To calculate interest ?

Answer 33

Interest = Principal * rate * time

Question 34

What are these ?
1. The rate is always expressed as an annual rate
2. The time is always a fraction and is always over 12 (bc there are 12 months in one year). The numerator represents the number of months that elapsed, or been used up, in the current year
3. For now we will assume all interest is repaid at the end of the loan rather than have monthly payments that include interest

Answer 34

3 key point to remember about the interest equation

Question 35

Is interest an example of an accrual or a deferral ?

Answer 35

accrual.
the interest revenue or expense is recorded first. the cash will either be paid or received later at the end of the loan term

Question 36

What is this ?
accounts are closed to a zero balance at the end of every year
*includes revenues, expenses, dividends

Answer 36

Nominal (temporary) accounts

Question 37

What is this ?
Permanent accounts are never closed to zero as part of the year end closing process
*includes assets, liabilities, equity

Answer 37

Permanent (real) accounts

Question 38

Revenues, expenses, dividends are examples of ?

Answer 38

Nominal (temporary) accounts
*these accounts are closed

Question 39

Assets, liabilities, equity are examples of ?

Answer 39

Permanent (real) accounts
*these accounts are not closed

Question 40

The purpose of closing entries is to transfer ?

Answer 40

transfer a net income or net loss and dividends to retained earnings

Question 41

What r the 3 closing entries that need to be made ?

Answer 41

1. close revenues into retained earnings
2. close expenses into retained earnings
3. close dividends into retained earnings

Question 42

To close out revenues to retained earnings you do the opposite of normal and ?

Answer 42

Debit each revenue account for its balance, and credit retained earnings for total revenues

Question 43

To close out expenses to retained earning you do the opposite of normal and ?

Answer 43

Debit retained earnings for total expense, and credit each expense account for its balance

Question 44

To close out dividends to retained earning you do the opposite of normal and ?

Answer 44

Debit retained earnings for the balance in the dividends account and credit dividends for the same account