Chapter 3: Adjusting Accounts for Financial Statements Flashcards
(13 cards)
Accrual Basis Accounting
Revenues (= when earned)
Expenses (= when incurred)
Cash Basis Accounting
Revenues (= cash receipts)
Expenses (= cash payments)
Prepaid Expense
Assets paid for in advance of receiving their benefits. When these assets are used, the advance payments become expenses.
Accumulated Depreciation
A separate contra account.
Contra Account
An account linked with another account. It has an opposite normal balance and is a subtraction from that other account’s balance.
Unearned Revenue
Cash receives in advance of providing products and services. When cash is accepted, the company has a liability to provide products or services.
Accrued Expenses
Costs incurred in a period that are both unpaid and unrecorded prior to adjustment. They are reported on the income statement for the period when incurred.
Accrued Interest Expense
Interest = Principle of the note x Annual interest rate x Time expressed year OR i=Prt
Accrued Salaries Expense
Salaries owed but not yet paid (calculated based on the number of days the employees have worked, determined by the unpaid days from the last payday to the period end date).
Accrued Revenues
Revenues earned in a period that are both unrecorded and not yet received in cash.
Unadjusted Trial Balance
A list of ledger accounts and balances before adjustments are made.
Adjusted Trial Balance
A list of accounts and balances after adjusting entries have been recorded and posted to the ledger.
Steps for preparing Financial Statements from Adjusted Trial Balance
Step 1: Prepare income statement using revenue and expense accounts from adjusted trial balance.
Step 2: Prepare statement of owner’s equity using capital and withdrawals account from the trial balance; pull profit from step 1.
Step 3: Prepare balance sheet using asset and liability account from trial balance; pull updated capital balance from Step 2.
