Unit 9 Flashcards
What is The trial balance?
The trial balance is a report run et the end of the accounting period. A trial balance is a list of accounts and their balances. It is usually prepared at the end of an accounting period.
It is primarily used to ensure that the total of all debits is equal to the total of all credits, which means that there are no unbalanced journal entries in the accounting system that would make it impossible to generate accurate Financial statements. Thus, the trial balance is used to prove or check, that the debits equal the credits after posting. So, the sum of the debit account balances in the trial balance should equal the sum of the credit account balances.
The trial balance contains the following columns of information:
Account number, account name, ending debit balance and ending credit balance.
Each line item indicates the ending balance in an account, which comes from the General ledger.
Can you explain why we need adjustments at the end of the period to be able to develop financial statements?
At the end of the period, we need to make adjusting entries to bring the accounts up to date for the financial statements.
Describe and explain the types of adjustment and give examples.
Accruals
Transactions for which cash has NOT yet been received or paid, but the effect of which must be recorded in the accounts to accomplish a matching of revenues and expenses.
Ex: wages expences occured in 2022 but not yet paid
(work performed during December that will be paid in January);
utility cost occured in 2022 but not yet paid;
service performed in 2022 but not yet billed;
interest earned in 2022 but not yet received, etc.
Reclassifications
The initial recording of a transaction does not result in assigning revenues to the period in which they were earned, or expenses to the period in which they were incurred.
Thus, an amount must be reclassified from one account to anther (at the end of the accounting period) to reflect the appropriate balance in each account.
Ex: reclassification of supplies; prepaid Insurance; unearned revenue;
unearned rental revenue; Airline Ticket Advanced Sales
Does ‘the closing process’ transfer the year-end balances of all income statement accounts and dividends to the retained earnings account? Why do we need to undertake this operation? How is the closing process accomplished?
The closing process simply transfers the year-end balances of all income statement accounts (e.g., revenues, expenses, gains, and losses) to the retained earnings account. In addition, if any dividends declared during the year were accumulated in a separate ‘dividends’ account the balance in that account would also be closed to Retained earnings
What is the accounting time period, what is the meaning of Accrual-basis accounting and how does this latter refer to Adjustments?
Both small and large companies prepare FSs periodically to assess their financial condition and results of operations. Accounting time periods are generally a month, a quarter or a year.
Monthly and quarterly time periods are called interim periods. Many large companies are required to prepare both quarterly and annual financial statements.
An accounting time period that is one year in length is referred to as a fiscal year. The accounting period used by most businesses coincides with the calendar year.
In accordance with the GAAP (Generally accepted accounting principles) under the Accrual-basis accounting transactions that change a company’s FSs are recorded in the periods in which the events occur.
