Ch. 4 - Accrual Accounting Concepts

Question 1

[Regular] Business Activities

Answer 1

-Revenue and associated cash receipt may or may not occur at the same time
-Expense and associated cash payment may or may not occur at the same time

Question 2

Cash Basis

Answer 2

-Recognizes transactions at point of cash receipt or cash payment
-Revenue is recorded when cash is received
-Expenses are recorded when cash is paid

May result in misleading info for decision-making.
>ex. timing differences between cash flows and actual occurrence of business transactions

Question 3

Accrual Basis

Answer 3

-Business transaction is recorded in the period that the event occurred
-Revenue is recorded when earned, not when cash is received
-Expenses are recorded when consumed/used, not when cash is paid

Question 4

Adjusting Entries (Required)

Answer 4

Required when:
a) Earned revenue and associated cash receipt do not occur at the same time
b) Incurred expense and associated cash payment do not occur at the same time

Question 5

Adjusting Entries (Ensures)

Answer 5

1. Asset and liability accounts are reported at their correct amounts
2. Revenues are recorded in the period earned
3. Expenses are recorded in the period occurred

Question 6

Expense Recognition

Answer 6

Expense: decrease in economic resource. Cost of asset consumed or service used to generate revenue

Expenses are Recognized When:
- Asset is consumed
- Liability is incurred

-Whenever possible, expenses are recognized in the period that effort is made in order to generate revenue.

Question 7

Types of Adjusting Entries

Answer 7

Each adjusting entry involves a Statement of Financial Position account and a Statement of Income account.
–Do NOT involve the CASH account.

Types of Adjusting Entries:
- Prepayments (aka deferrals) : adjustments for amounts previously recorded
- Accruals: adjustments for amounts NOT previously recorded

Question 8

Prepaid Expenses

Answer 8

Previously recorded asset becomes an expense:
-Usage of prepaid expense
-Depreciation of a tangible non-current asset

DR expense account (SI) xxx
CR asset account (SFP) xxx

Question 9

Deferred Revenues

Answer 9

Previously recorded liability becomes revenue
-Recognizing deferred revenue.

DR liability account (SFP) xxx
CR revenue account (SI) xxx

Question 10

Depreciation

Answer 10

• Allocation (ex. expensing) of the cost of a tangible non-current asset over its estimated useful life.
• Systemically assigns a portion of the cost of an asset to expense to an accounting period
• Straight Line Method

Question 11

Depreciation Expense Formula

Answer 11

(cost - residual value) / estimated useful life

Question 12

Accumulated Depreciation

Answer 12

• Cumulative amount of depreciation expense recorded to date
• Contra asset account
  -Carrying value

Question 13

Carrying Value Formula

Answer 13

Cost - Accumulated Depreciation

Question 14

Accrued Expenses

Answer 14

Recording Expenses and liabilities not previously recorded.
- Wages for time worked in an accounting period but not yet paid
- Internet incurred on a bank loan but yet paid

DR expense account xxx
CR liability account xxx

Question 15

Accrued Revenues

Answer 15

Recording assets and revenues not previously recorded.
- Interest earned but yet received
- Services performed but neither billed not collected

DR asset account xxx
CR revenue account xxx

Question 16

Adjusted Trial Balance

Answer 16

• Accounting worksheet that lists the DR and CR balances of all accounts after adjusting entries have been recorded and posted
• Total DR must equal total CR for the adjusted trial balance to BALANCE.

Note: adjusted trial balance in balance does NOT necessarily indicate that all transactions in an accounting period have been recorded properly.

Question 17

Journalize and Post Closing Entries (types of accounts)

Answer 17

• Temporary Accounts
  -Permanent Accounts
  -Closing Entries

Question 18

Temporary Accounts

Answer 18

Revenue accounts, expense accounts, and dividends declared.
- Components of retained earnings

Question 19

Permanent Accounts

Answer 19

Asset, liability, and shareholders’ equity accounts
- Statement of financial position accounts

Question 20

Closing Entries

Answer 20

Temporary account balances are transferred to Retained Earnings.
- Results in a zero balance in each temporary account, preparing them for next period’s activity.
- Updates Retained Earnings to its ending balance for the current period.

Question 21

The Closing Process

Answer 21

A. Revenue and expense accounts closed into Income Summary
B. Income Summary and Dividends Declared closed into Retained Earnings

1. Close revenue accounts
2. Close expense accounts
3. Close income summary
4. Close dividends declared

Question 22

Post- Closing Trial Balance

Answer 22

• Accounting worksheet that lists the DR and CR balances of all permanent accounts AFTER closing entries have been recorded and posted.
  -DR = CR to balance