ch 4 Flashcards
(20 cards)
Adjustments
entries made at the end of every accounting period to report revenues and expenses in the proper period and assets and liabilities ar appropriate amounts
adjustments can be grouped into 2 catagories
accrual and deferrals
Deferal adjustments
involves revenue or expenses
for examples paying rent in advance - the expense is initially deferred as an asset on the balance sheet the adjustment part come later at the end of the month when when one month of the prepaid rent benefits have been used up
another example is writting unearned revenu on the BS . it is defeered as a liability . later, when the company distributes the magazines, and earning the revenue a defereeal adjustment is made to reduce unearned revenue aon the BS and increase revenue on the income statement.
2 key notes of deferral adjustments
- deferal adjustments are used to decxrease BS accounts and increase corresponding IS accoutns
- Each deferal adjustment involves one asset and one expense account or one liability and one revenue account
Accrual adjustments
neede when a company has earned revenue or incurred expense in the current period but has not yet recorded it. for example pizza palcae will eventually pay taxes on the income it earns this period so an accrual adj. willl be needed at the end of the monthto record increases in its income tax expense and income tax payable accounts
another example is if interest revenue is earned on investments but not received in cash until a later month
2 key ideas of accrual
use to record revenue or E when they occur prior to receiving or paying cash and to adjust corresponding BS accounts
- each adjustment involves one asset and one revenue account or 1 liability and one expense account
oposite of deferal accounting
adjusting journal entries
record the effects of each period adjustments in adebit-equals-credits format
carried value
the amount an asset or liability is reported at in the fianancial statements it is also known as net book value or simply book value
depriciation
the process of allocation the cost of buildings , vehicles, and equipement to the accounting perood in which they are used - also knows as amortization
contra-account
an account that is an offset to, or reduction of another account
created to keep track of all deprication recorded agsint equipemtn
is like a negative assetr account that is subtracted from the equipment account in the assets section of the balance sheet
how does the matching principle - expense recognition principle affect affect the equipement assets
indicated tha twhen equipment used to generate revenue in the current period, part od its costs should be transferred to an expense account in that period
4 key things to note for reporting depriciation of equipemtn
- accumulated depreciation is a balance sheet account and depreciation expense is an income statement account
- by recording depriciation in accumulated depreciation separate from the equipment account you can report both the original cost of equipement and a running total of the amount that has been depreciated
- the normal balance in a contra ccount is always the opposite of the acount it off-sets
- the amount of depriciation depends on the method used for defering it
how does adjustments affect cash
IT DOESNT
WHAT IS ALWAYS included when making adj
one BS and one IS ACCOUNT
ADJUSTED TRIAL BALANCE
a list of all accounts and theri adjusted balances to check on the qualities of the recorded debits and credits
permanent accounts
tracks financial results from tear to year by carrying its ending balances into the next year.
for example retained earnings’ ending balance from one tear becomes its beggining balance in another
Temporary accounts
accounts tha track financial results for a limited period of time by having theri balance zeroed out at the end of the year, for examples, dividend, revenues and expenses
the 2 purposes of the closing process
- transfer net income and dividends to retained Earning
2. eztablish zero balances in all income statement and dividends accounts
2 things needed to close journal accoutns
- debit each revenue account for the amount of its credit balance , credit each expense account for the amount of its debit balance and record the different in RE- should = Net income
- credit dividends declared account for the amount of its debit balance and debit RE for the same amount
post-closing trial balance
AN INTERNAL REPORT PREPARED AS THE LAST STEP IN THE ACCOUNTING CYCLE TO CHECK THAT DEBITS EQAUL CREDITS AND ALL TEMP ACCOUNTS HAVE BEEN CLOSED
