Week 5 - Trial Balances and Balance Day Adjustments Flashcards
What is a trial balance?
o capital contributions, drawings, sales made from previous periods, COGS, paying interest on a loan
How are the accounts listed in a trial balance?
o List of all accounts in: Order (ALORE); as they appear in the general ledger and their closing balances at a given time
What are the steps in order to prepare a trial balance?
o List all accounts including names, balances; on the debit or credit side
o Total debit and credits columns
o Verify that debits EQUAL the credits column.
What is the necessity of balance day adjustments
o Revenues are recorded when earned
o They are then matched against expenses that have been incurred in the accounting period
What do balance day adjustments ensure?
o Balance day adjustments ensure that the financial statements portray a correct picture of the firm’s financial performance and financial position
o Prevents overstating or understating profits/loses
What happens if you don’t do a balance day adjusment
o Revenue (income); and/or Expenses may be understated or overstated
o Assets and/or liabilities of the firm being overstated or understated
o Will have wrong numbers on financial statement
Are prepaid expenses an asset or liability
Asset
What are prepaid expenses
o These are expenses that have been paid in advance of being incurred
What are accrued revenued
o Expenses that have been incurred but not yet paid in cash
Is prepaid/unearned revenue a liability or an asset
o Liability
What is prepaid/unearned revenue?
o Cash that is received before revenue is earned i.e interest at a bank
Is accrued revenue an asset or a libility
Asset
What is accrued revenue
o Revenue that has been earned but not yet received in cash e.g accrued wages
What is depreciation?
o Depreciation allocates the cost of a non-current asset over its useful life.
o Converts an asset into an expense
What is used to calculate depreciation?
o A straight-line method is used to calculate depreciation
