Module 2 - Exam 2 Study Deck Flashcards
Records revenues when earned and expenses when incurred
Accrual-Basis Accounting
What is it called whenever you record revenues when earned?
The Revenue Recognition Principal
What is it called whenever you record expenses when incurred
Expense Recognition Principal
What does it mean whenever revenue is “earned”?
Whenever the obligation to the customer was filled or the service was performed. For example: Calvin books a cruise with Carnival in November 2022. The Cruise Happens in January 2023. When would Carnival record this? in January 2023.
What is the other name for the Expense Recognition Principal?
The Matching Principal
Why is it also called the matching principal?
Often expenses are recognized with the revenues they help to generate.
What is the difference between Cash Basis and accrual Basis?
Cash-Basis Records whenever payment is fulfilled. Accrual basis reports whenever the obligation is fulfilled. Accrual basis captures the activities of the company while the cash basis capture the exchange of currency within the company.
What is the purpose of recording Adjusting Entries?
To record expenses in the period they are incurred in the generation of revenues, to record revenues in the period earned, and to record events that have occurred, but have not been recorded. Lastly, to correctly state assets and liabilities in the balance sheet.
Why would have adjusting entries?
Whenever cash and accrual (recording when the service or obligation to the customer was met) differs.
When do you record adjusting entries?
At the end of the reporting cycle or preparing a financial statement
What are the two types of adjusting entries?
Prepayments and Accruals
we paid cash (or had an obligation to pay gash) for the purchase of an asset before we sue the asset up (incurred the expense)
Prepaid expenses
We receive cash and recorded a liability before we earned the revenue
Unearned revenue
Getting paid before preforming the service or paying someone before the service was met
Prepayment
Paying Cash after we incurred the expense and recorded a liability
Accrued Expenses
We received cash after we earned the revenue and recorded the asset
Accrued Revenues
A contra asset account that keeps track of the total depreciation occurred to a property, plant, or equipment (a long-term asset)
Accumulated Depreciation
What is a contra-asset account?
They are asset accounts that will always have a credit balance. In this case, it is used to record total depreciation.
Whenever you are closing revenues/gains what do you do?
Debit each revenue account and credit retained earnings
Whenever you are closing expenses/losses what do you do?
Debit retained earnings and credit each expense account
Whenever you close dividends, what do you do?
Debit retained Earnings and Credit Dividends
What’s is the difference between gains and losses vs revenues and expenses?
Gains and Losses occur from peripheral activities outside of normal business operations.
Which accounts are closed in the closeout process?
Temporary Accounts
Where can all of your temporary accounts be found at?
Everything on the income statement is a temporary account and should be closed.
Are permanent accounts closed?
No.
What are examples of permanent accounts?
Assets, Liabilities, and SE accounts.
When do you make closing entries?
At the end of the reporting cycle
Why would you have adjusting entries?
If cash and accrual differs (in most cases it does, unless the obligation to the customer was filled and cash was exchanged within the same accounting period.)
What would your first entry be for prepaid expenses?
Your assets would increase because you are paying for something in advance (debiting an asset account) and depending on how you pay for it you would either A. Credit an asset account (Cash is dished out) or B. Credit a liability account (payment will be paid later, accounts payable)
What would your adjusting entry be for prepaid expenses at the end of an accounting period?
You would debit an expense account to show that you have used up some of these prepaid assets (Expenses would go up) and then you would credit the asset account because you have used up some of the prepaid asset. This is to accurately show the attrition of these assets each financial recording period.
What would your first entry be on Unearned Revenue?
You would debit cash or accounts receivable (based on how the customer would pay you) and you would credit unearned revenue (because they paid you for work you haven’t performed and it is a liablility.)
What would your adjusting entry be at the end of the month for unearned Revenue?
Your liability would go down based on how much work you have done (debit) and you would credit the revenue account based on how much you performed.
Do you have an initial entry on accrued expenses?
No
Why don’t you have an initial entry on accrued expenses?
Because you have accrued expenses throughout the the month. So you need to record that at the end of the accounting period. Unless, you paid for those expenses within the same accounting period, then you would only have one entry. The only reason you would have adjusting entries is when the expenses and the payment for those expenses fall in a different recording period.
So what would be your first entry (adjusting entry) for accrued expeneses?
You would debit an expense account to show that you have used up some expenses. The company has billed you for these expenses, but you have yet to pay them. You would also credit a liability accoutn because there is liability associated with using up something before you pay it.
What would your second entry be for accrued expenses?
This would be whenever the exchange of cash actually takes place. So you would debit the liability (decrease the liability) and credit the cash (decrease the cash). You are paying money to decrease the liability.
What would your adjusting entry be on accrued revenue?
Debit accounts receivable because the obligation has been made to pay you based on work you did in the past. You would credit the revenue account because the work was earned in this period.
What would your second entry be on accrued revenue?
You would debit the cash account because the customer has paid for the services you have performed nad you would credit the accounts recievable because you have received the cash and not expecting that cash anymore.
Revenues and expenses are matched within the same time period. These are temporary accounts. These will be closed at the end of the accounting period
extra info
a list of all accounts and their balances after we have updated account balances for adjusting entries
Adjusted trial balance
Why is it best to wait until the post-closing trial balance until you prepare your balance sheet?
Because all accounts on the balance sheet will reflect its true numbers after all temporary accounts are closed.
The expense recognition principle states that:
Expense should be recognized in the period incurred.
Adjusting entries:
Always involve at least one revenue/expense and one balance sheet account.
An adjusted trial balance:
Is a list of all accounts and their balances after adjusting entries.
Making insurance payments in advance is an example of:
A prepaid expense.
LSUS Consulting provides 3 months consulting service for 6,000 to Scheinert Inc. starting Jan 1, 2023. The payment is due on March 31st. Please assume service are performed evenly throughout months. On Jan 31, 2023 LSUS prepare a financial statement, what would LSUS consulting record as the adjusting entry for this consulting work on Jan 31, 2023?
Debit accounts receivable for 2,000; Credit consulting services for 2,000
On April 1, a $4,800 premium on a one-year insurance policy on equipment was paid and charged to Prepaid Insurance. At the end of the year, the adjusting entry would be:
debit insurance Expense, $3,600; credit prepaid Insurance $3,600.
At the beginning of December, LSUS Corporation had $1,000 in supplies on hand. During the month, supplies purchased amounted to $2,000, but by the end of the month the supplies balance was only $200. What is the appropriate month-end adjusting entry?
Debit Supplies Expense $2,800, credit Supplies $2,800.
On September 1, 2022, LSUS Magazine sold 100 one-year subscriptions for $120 each. The total amount received was credited to Unearned Revenue. What would be the required adjusting entry at December 31, 2022?
Debit unearned revenue by $4,000, credit service revenue by $4,000
At beginning of year 1, LSUS purchased a $10,000 manufacturing equipment that is estimated to be used for five years. (no residue value after five years) If the equipment is going to be depreciated evenly over five years, what would be the correct adjusting entry at end of year1 for this equipment?
Debit depreciation expense for $2,000; credit accumulated depreciation for $2,000
Mod Inc.’s beginning of October supplies was $400. Mod purchased $800 worth of supplies during October. At the end of October Mod’s balance of supplies was $500. What will be Mod’s end of October adjusting entry for supplies?
Debit supplies expenses for $700; Credit supplies for $700
The primary difference between accrual-basis and cash-basis accounting is:
The timing of when revenues and expenses are recorded.
The income statement reports earned income on _____, and the cashflow statement is based on ______.
An accrual-basis, cash-basis accounting
The employees of smallshop work Monday through Friday. Every Friday the company issues payroll checks totaling $5,000. The current pay period ends on Friday, January 3. Smallshop is now preparing financial statements for the year ended December 31, (which is a Tuesday). What is the adjusting entry to record accrued salaries at the end of the year?
debit salaries expense by 2,000, credit salaries payable by 2,000
LSUS consulting incurred $500 utility expense during their first month of operation. They will pay 20 days later when the bill is due. What would be the adjusting entry at the end of the month when LSUS prepare the financial statement?
Debit utility expense for $500; Credit utility payable for $500
The closing entry for revenues includes:
A debit to Revenues and a credit to Retained Earnings.
The closing entry for expenses includes:
A debit to Retained Earnings and a credit to all expense accounts.
Permanent accounts would not include:
Interest Expense.
The closing process includes which of the following?
Closing the balances of revenue, expense and dividend accounts to zero.
The trial balance best for prepare income statement is:
adjusted trial balance
When preparing balance sheet you have the choices of using the following trial balances: the unadjusted, adjusted, and post-closing balance. Which one of the three would make the preparation process the easiest (least steps) as well as ensure the accuracy of the financial statement?
post-closing trial balance
The purpose of closing entries is to transfer:
Balances in temporary accounts to a permanent account.
When a company makes an end-of-period adjusting entry which includes a debit to Utilities Expense, the usual credit entry is made to:
Accounts (utilities) Payable.
Which of the following accounts is NOT involved in closing entries?
Prepaid Insurance.
Which one of the following accounts would go to zero after closing entries?
Dividends
A list of all accounts and their balances after posting closing entries is referred to as:
A post-closing trial balance.
