Lesson 4 (Adjusting and Closing Process) Flashcards
Revenues are recorded in the period ?
earned
*regardless as to when cash is received or paid
Expenses are recognized in the period ?
Incurred
*regardless as to when cash is received or paid
What is this ?
are journal entries made at the end of an accounting period (end of year, end of month) to update account balances
adjusting entries
What are the two main categories of adjustments ?
- Defferals
- Accruals
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.)
Deferrals
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.)
Accruals
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
Deferred expenses (prepaid expenses)
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 ?
expense
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
Deferred Revenues (Unearned revenue)
The adjusting entry for deferred (unearned revenues) results in a debit to ____ and a credit to ___ ?
Debit to a liability account
Credit to a revenue
Unearned revenue is classified as ____ and appears on the balance sheet ?
liability
*is not classified as a revenue account and thus does not effect net income
The adjusting entry for deferred (prepaid) expenses results in a debit to _____ and a credit to _____ ?
Debit to an expense account
Credit to an asset account
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 ?
Used up
Adjusting entries for deferred (unearned) revenues are required to record the portion of the liability that represents the ?
revenue earned in the current period
What is this ?
Revenues earned by not yet received in cash or recorded Ex: sales of merchandise on account
Accrued revenues
What is this ?
Expenses incurred but not yet paid in cash or recorded Ex: salaries incurred by not yet paid for
Accrued expenses
Adjusting entries for accruals are required to record _____ and ______ in the current period but not yet received or paid in cash ?
record revenues earned and expenses incurred
For an accrued revenue you debit ____ and credit ____ ?
debit an asset account
credit a revenue account
For an accrued expenses you debit ____ and credit ____ ?
debit and expense account
credit a liability account
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
Depreciation
Depreciation has absolutely nothing to do with the value of an ?
asset
To record depreciation expense, debit ____ and credit ____ ?
debit depreciation expense
credit accumulated depreciation
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
Depreciation expense
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
Accumulated depreciation
Accumulated depreciation is a ?
Contra asset account
meaning it results in a reduction of assets
What is this equation for ?
(Cost - Residual Value) / Useful life = ?
Calculating annual depreciation expense
What is this ?
represents the company’s estimate of what the asset can be sold for at the end of its expected life
Residual value
Useful life is expressed in ?
years
Is depreciation an example of an accrual or a deferral ?
deferral.
the cash is paid first when the asset is purchased. the expense is recorded later as the asset gets used up
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)
Interest
What is this ?
when a company either borrows money and must repay it with interest
interest expense
What is this ?
when a company lends money to someone and is to be repaid with interest
interest revenue
To calculate interest ?
Interest = Principal * rate * time
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
3 key point to remember about the interest equation
Is interest an example of an accrual or a deferral ?
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
What is this ?
accounts are closed to a zero balance at the end of every year
*includes revenues, expenses, dividends
Nominal (temporary) accounts
What is this ?
Permanent accounts are never closed to zero as part of the year end closing process
*includes assets, liabilities, equity
Permanent (real) accounts
Revenues, expenses, dividends are examples of ?
Nominal (temporary) accounts
*these accounts are closed
Assets, liabilities, equity are examples of ?
Permanent (real) accounts
*these accounts are not closed
The purpose of closing entries is to transfer ?
transfer a net income or net loss and dividends to retained earnings
What r the 3 closing entries that need to be made ?
- close revenues into retained earnings
- close expenses into retained earnings
- close dividends into retained earnings
To close out revenues to retained earnings you do the opposite of normal and ?
Debit each revenue account for its balance, and credit retained earnings for total revenues
To close out expenses to retained earning you do the opposite of normal and ?
Debit retained earnings for total expense, and credit each expense account for its balance
To close out dividends to retained earning you do the opposite of normal and ?
Debit retained earnings for the balance in the dividends account and credit dividends for the same account
