Adjusting The Accounts

Question 1

how is net income calculated

Answer 1

revenues - expenses

Question 2

define time period assumption

another term for it

Answer 2

division of economic life of a business into artificial time period

separating economic life and business

aka PERIODICITY ASSUMPTION

Question 3

when are accounting time periods

Answer 3

monthly
quarterly
annually

Question 4

monthly and quarterly time periods are called what

Answer 4

INTERIM PERIODS

Question 5

FISCAL YEAR

Answer 5

accounting period that is ONE YEAR in length

begins with the first day of a month and ends 12 months later on the LAST day of the month

Question 6

CALENDAR YEAR

Answer 6

01/01 - 12/31

Question 7

define accrual basis accounting

Answer 7

transactions are recorded that change a company’s financial statements IN THE PERIODS IN WHICH THE EVENTS OCCUR

TRANSACTIONS ARE RECORDED KUNG KAILAN GINAWA

Question 8

define cash-basis accounting

Answer 8

companies record revenue at the time they receive cash

Question 9

define performance obligation

Answer 9

when a company agrees to performa service or sell a product to a customer

Question 10

define REVENUE RECOGNITION PPRINCIPLE

Answer 10

requires that company must recognize revenue in the acctg period in which THE PERFORMANCE OBLIGATION IS SATISFIED

record revenue in june when it was performed rather than july when you have received the payment

Question 11

define EXPENSE RECOGNITION PRINCIPLE

Answer 11

recogize expenses in the time period in which THEY MAKE EFFORTS (consume assets or incur liabilities) TO GENERATE REVENUE

Question 12

define ADJUSTING ENTRIES

Answer 12

used in order for revenues to be recorded in the period in which services are performed and expenses are recognized in which they are incurred

ENSURES THAT THE REVENUE RECOGNITION AND EXPENSE RECOGNITION PRINCIPLES ARE FOLLOWED

Question 13

why is an adjusting entry necessary

Answer 13

because the trial balance may not be up to date

Question 14

what does an adjusting entry entail

Answer 14

• required for every company’s financial statement

- every adjusting entry must include 1 income statement account and 1 statement of financial position account

Question 15

2 types of adjusting entries

Answer 15

defferals

accruals

Question 16

Define Deferrals

Answer 16

expenses/revenues that are recognized at a date LATER THAN THE POINT WHEN CASH WAS ORIGINALLY EXCHANGED

Question 17

2 types of deferrals

Answer 17

prepaid expenses

unearned revenues

Question 18

prepaid expenses

Answer 18

expenses paid in cash BEFORE they are used or consumed

costs that EXPIRE either with the PASSAGE OF TIME or THROUGH USE

Question 19

example of prepaid expenses

Answer 19

rent
insurance
supplies

Question 20

what happens during an adjusting entry in a prepaid expense

Answer 20

debit increase to expense account

credit decrease to an asset account

Question 21

purchase of supplies for 2500

inventory reveals that 1000 of the supplies are still on hand

Answer 21

debit increase in supplies expense

credit decrease in supplies account

Question 22

insurance paid in advance adjustment

Answer 22

debit increase in expenses (insurance expenses account)

credit decrease in assets (prepaid insurance account)

Question 23

Define depreciation

Answer 23

process of allocating the cost of an asset to expense over its useful life

useful life = period of service

Question 24

is depreciation an allocation concept?

Answer 24

yes. it is NOT a valuation concept

it allocates an asset’s cost to the periods in which it is used

it does not attempt to report the actual change in the value of the asset

Question 25

what is the contra asset account of depreciation?

Answer 25

accumulated depreciation = credit balance

Question 26

depreciation effect

Answer 26

debit increase in depreciation expense | credit increase in contra asset account (accumulated depreciation)

Question 27

define book value

Answer 27

difference between the cost of any depreciable asset and its related accumulated depreciation

Question 28

what is the purpose of depreciation?

Answer 28

cost allocation (not valuation)

Question 29

Define UNEARNED REVENUES

Answer 29

cash received before services are performed the company has a PERFORMANCE OBLIGATION (liability) to is customers credit increase in liability debit increase in assets (cash)

Question 30

unearned revenue is the opposite of prepaid expense

Answer 30

unearned revenue of one company is prepaid expense on another company

Question 31

what is the adjusting entry for unearned revenues?

Answer 31

debit decrease to a liability account credit increase to a revenue account both in onwer's equity

Question 32

2 types of accruals

Answer 32

accrued revenues | accrued expenses

Question 33

define accrued revenues

Answer 33

revenue for services performed but not yet received in cash or recorded also applies to services performed but the bill is not yet collected

Question 34

adjusting entry for accrued revenues

Answer 34

debit increase in asset account | credit increase to revenue account

Question 35

collection of receivables

Answer 35

debit increase to cash | credit decrease to accounts receivable

Question 36

define accrued expenses

Answer 36

expenses incurred but not yet paid in cash or not yet recorded

Question 37

adjusting entry for an accrued expense

Answer 37

debit increase to expense account (TATAAS ang bayarin) | credit increase to liability account

Question 38

accrued interest effect

Answer 38

1. face value of note 2. annual interest rate 3. length of time the note is outstanding debit increase to expense account credit increase to liability account

Question 39

accrued salaries and wages EFFECT

Answer 39

debit increase expenses (salaries and wages expense account) | credit increase liabilities (salaries and wages payable

Question 40

prepaid expenses

Answer 40

assets overstated expenses understated debit increase expenses credit decrease asset

Question 41

unearned revenues effect

Answer 41

liabilities overstated revenue understated debit decrease liabilities credit increase revenues

Question 42

accrued revenues

Answer 42

assets understated revenues understated debit increase asset account credit increase revenue account

Question 43

accrued expenses

Answer 43

expenses understated liabilities understated debit increase expenses credit increase liabilities