Review: Accounting Cycle Basics Flashcards
1
Q
What is an accounting transaction?
A
An accounting transaction occurs when assets, liabilities, or shareholders’ equity items change as a result of some economic event.
Not all events are recorded in the financial statements—only those that affect the financial position of the company (i.e., assets, liabilities, or shareholders’ equity) are considered accounting transactions.
2
Q
What types of events require recording as accounting transactions?
A
Examples of events that require recording include:
Purchase of a computer by a company.
Payment of rent.
Sale of goods or services.
Events that do not change the company’s financial position, such as discussing a potential transaction with a customer, do not require recording.
3
Q
How do you determine if an economic event should be recorded as an accounting transaction?
A
You should ask: “Is the financial position (assets, liabilities, or shareholders’ equity) of the company changed?”
Yes: If the answer is yes, then the event should be recorded as an accounting transaction.
No: If the answer is no, then the event should not be recorded.
4
Q
What is the significance of the criterion “Is the financial position of the company changed?” in accounting transactions?
A
This criterion is crucial because it determines whether an economic event has a measurable impact on the company’s financial status, thus requiring it to be recorded in the accounting records.
This ensures that only relevant financial information is included in financial statements, providing an accurate picture of the company’s financial health.
5
Q
What is the basic accounting equation?
A
The basic accounting equation is:
**
Assets=Liabilities+Shareholders’Equity**
This equation must always balance, and every transaction affects the equation in a way that maintains this balance.
6
Q
What is transaction analysis?
A
Transaction analysis is the process of identifying the specific effects of economic events on the accounting equation.
Every transaction has a dual effect, meaning if one asset increases, another asset, liability, or equity must change to keep the equation balanced.
7
Q
What happens in the accounting equation when a company purchases equipment by paying part cash and signing a note for the balance?
A
For example, if a company purchases equipment for $10,000 by paying $6,000 in cash and signing a note for $4,000:
Equipment (an asset) increases by $10,000.
Cash (an asset) decreases by $6,000.
Notes Payable (a liability) increases by $4,000. This keeps the accounting equation balanced:
Assets = Liabilities + Shareholders’ Equity
+10,000 - 6,000 = +4,000
8
Q
What does the expanded accounting equation include?
A
Assets = Liabilities + Shareholders’ Equity
Where:
Shareholders’ Equity is further broken down into:
Common Shares
Retained Earnings
Retained Earnings is affected by:
Revenues (which increase Retained Earnings)
Expenses (which decrease Retained Earnings)
Dividends (which decrease Retained Earnings)
9
Q
What happens when shareholders invest cash into the business?
A
When shareholders invest cash into the business, for example, $10,000:
Cash (an asset) increases by $10,000.
Common Shares (part of Shareholders’ Equity) increases by $10,000. The accounting equation remains balanced:
Assets = Liabilities + Shareholders’ Equity
+10,000 = +10,000
10
Q
What is the effect of borrowing cash through a note payable?
A
When a company borrows cash through a note payable, for example, $5,000:
Cash (an asset) increases by $5,000.
Notes Payable (a liability) increases by $5,000.
The accounting equation remains balanced:
Assets = Liabilities + Shareholders’ Equity
+5,000 = +5,000
11
Q
How does purchasing equipment for cash affect the accounting equation?
A
When a company purchases equipment by paying cash, for example, $5,000:
Equipment (an asset) increases by $5,000.
Cash (an asset) decreases by $5,000.
The total amount of assets remains the same, so the accounting equation is balanced.
12
Q
What happens when cash is received in advance from a customer?
A
When a company receives cash in advance from a customer, for example, $1,200:
Cash (an asset) increases by $1,200.
Unearned Revenue (a liability) increases by $1,200 because the service has not yet been performed.
The accounting equation remains balanced:
13
Q
What is the effect of performing services for cash on the accounting equation?
A
When a company performs services for cash, for example, $10,000:
Cash (an asset) increases by $10,000.
Service Revenue (part of Retained Earnings in Shareholders’ Equity) increases by $10,000.
The accounting equation remains balanced:
14
Q
How does the concept of “revenue recognition” affect the timing of when revenue is recorded in the accounting equation?
A
Revenue is recognized when the work is performed, not when cash is received.
If cash is received before the service is performed, it is recorded as a liability (Unearned Revenue) until the service is completed.
Once the service is performed, the liability is reduced, and revenue is recorded, increasing shareholders’ equity.
15
Q
How does the payment of rent affect the accounting equation?
A
When a company pays rent, for example, $900:
Effect on Assets: Cash decreases by $900
Effect on Shareholders’ Equity: Rent Expense (which reduces Retained Earnings) increases by $900
Assets = Liabilities + Shareholders’ Equity
-900 = -900
16
Q
What is the effect of purchasing an insurance policy for cash?
A
When a company purchases an insurance policy, for example, $600:
Effect on Assets:
Cash decreases by $600
Prepaid Insurance (an asset) increases by $600
Accounting Equation:
Assets = Liabilities + Shareholders’ Equity
-600 + 600 = 0
17
Q
How does purchasing supplies on account affect the accounting equation?
A
When a company purchases supplies on account, for example, $2,500:
Effect on Assets:
Supplies (an asset) increases by $2,500
Effect on Liabilities:
Accounts Payable increases by $2,500
Assets = Liabilities + Shareholders’ Equity
+2,500 = +2,500
18
Q
What is an account in accounting?
A
An account is an individual accounting record of increases and decreases in a specific asset, liability, shareholders’ equity, revenue, or expense item.
An account typically consists of three parts:
The title of the account
A left or debit side
A right or credit side
19
Q
What is a T-account?
A
A T-account is a basic form of an account that resembles the letter “T.” It has a title at the top, with the left side representing debits (Dr.) and the right side representing credits (Cr.).
20
Q
What do debits and credits indicate in accounting?
A
Debit (Dr.): Indicates the left side of an account.
Credit (Cr.): Indicates the right side of an account.
They do not mean increase or decrease. Whether a debit or credit indicates an increase or decrease depends on the type of account.
21
Q
What is a debit balance and a credit balance?
A
Debit Balance: Occurs when the total of the debit amounts exceeds the credits in an account.
Credit Balance: Occurs when the credit amounts exceed the debits in an account.
22
Q
How do you record increases and decreases in cash?
A
Increases in cash: Recorded as debits (left side).
Decreases in cash: Recorded as credits (right side).
23
Q
What is the double-entry system in accounting?
A
The double-entry system is a method where each transaction is recorded in at least two accounts, with debits equaling credits.
This system ensures the accounting equation remains balanced and helps detect errors.
24
Q
How do debits and credits affect assets and liabilities?
A
Assets:
Debit increases assets.
Credit decreases assets.
Liabilities:
Debit decreases liabilities.
Credit increases liabilities.
Normal balances:
Asset accounts normally show a debit balance.
Liability accounts normally show a credit balance.
25
What is the normal balance for assets and liabilities?
Assets: Debit for increase, Credit for decrease.
Liabilities: Debit for decrease, Credit for increase.
This indicates how increases and decreases in the account are recorded.
26
How do debits and credits affect the Common Shares account?
Debits: Decrease Common Shares.
Credits: Increase Common Shares.
Normal Balance:
Common Shares account normally has a credit balance.
27
What are Retained Earnings and how do debits and credits affect this account?
Retained Earnings represent the net income retained in the business, which is accumulated in the shareholders' equity through profitable operations.
Debits: Decrease Retained Earnings (e.g., by net loss).
Credits: Increase Retained Earnings (e.g., by net income).
Normal Balance:
Retained Earnings account normally has a credit balance.
28
What effect do dividends have on Retained Earnings?
Dividends are distributions by a corporation to its shareholders, reducing shareholders' claims on retained earnings.
Debits: Increase in Dividends (which decreases Retained Earnings).
Credits: Decrease in Dividends.
Normal Balance:
Dividends account normally has a debit balance.
29
How do revenues and expenses affect shareholders' equity?
Revenues: Increase shareholders' equity. They are increased by credits and decreased by debits.
Expenses: Decrease shareholders' equity. They are increased by debits and decreased by credits.
Normal Balances:
Revenue accounts: Normally show credit balances.
Expense accounts: Normally show debit balances.
30
Why is it important to understand the normal balances of accounts in accounting?
Understanding the normal balances of accounts helps identify errors and ensures that transactions are recorded correctly.
For example, an asset account should normally show a debit balance.
If it shows a credit balance, it may indicate an error unless it's an exceptional case. Similarly, knowing the normal balances helps ensure that debits and credits are applied appropriately in the double-entry system, keeping the accounting equation balanced.
31
How are the subdivisions of shareholders' equity reported in the financial statements?
Common Shares and Retained Earnings: Reported in the shareholders' equity section of the balance sheet.
Dividends: Reported on the statement of retained earnings.
Revenues and Expenses: Reported on the income statement.
Changes in any of these items affect shareholders' equity as they are eventually transferred to retained earnings at the end of the period.
32
How do the income statement, statement of retained earnings, and balance sheet interrelate?
Income Statement: Calculates net income or net loss (Revenues - Expenses).
Statement of Retained Earnings: Starts with beginning retained earnings, adds net income, subtracts dividends, and results in ending retained earnings.
Balance Sheet: Lists assets, liabilities, and shareholders' equity, which includes common shares and retained earnings (affected by net income and dividends).
33
What are the key debit/credit rules summarized for each type of account?
**Assets**:
Debit increases (+)
Credit decreases (-)
**Liabilities:**
Debit decreases (-)
Credit increases (+)
**Common Shares:**
Debit decreases (-)
Credit increases (+)
**Retained Earnings:**
Debit decreases (-)
Credit increases (+)
**Revenues:**
Debit decreases (-)
Credit increases (+)
**Expenses:**
Debit increases (+)
Credit decreases (-)
**Dividends:**
Debit increases (+)
Credit decreases (-)
34
Why is it important to understand the relationships between the income statement, retained earnings statement, and balance sheet?
Understanding these relationships is crucial because they provide a comprehensive view of a company's financial performance and position.
The income statement affects retained earnings, which in turn affects shareholders' equity on the balance sheet.
Errors in one statement can cascade and cause inaccuracies in the others, leading to a misrepresentation of the company's financial health.
35
What are the basic steps in the recording process?
The recording process involves three basic steps:
Analyze each transaction in terms of its effect on the accounts.
Enter the transaction information in a journal.
Transfer the journal information to the appropriate accounts in the ledger.
This process typically begins with a source document (such as a sales slip, cheque, bill, or cash register document), which provides evidence of the transaction. The information from the source document is analyzed, then recorded in the journal, and finally posted to the ledger.
36
What are the three significant contributions of the journal to the recording process?
The journal makes three significant contributions to the recording process:
It discloses in one place the complete effect of a transaction.
It provides a chronological record of transactions.
It helps to prevent or locate errors by allowing the debit and credit amounts for each entry to be readily compared.
37
What is the process of journalizing?
**Journalizing** is the process of entering transaction data in the journal.
Each transaction is recorded in chronological order, showing the debit and credit effects on specific accounts.
38
What features should be included in a journal entry?
A journal entry should include:
Date of the transaction in the Date column.
Account to be debited is listed first, at the left. The credited account is listed on the next line, indented.
Amounts for debits and credits are recorded in the Debit and Credit columns, respectively.
Brief explanation of the transaction to clarify the nature of the transaction.
It is important to use correct and specific account titles in journalizing to ensure accuracy in financial statements.
39
What is a trial balance?
A trial balance lists accounts and their balances at a given time, prepared at the end of an accounting period to ensure that the total debits equal the total credits, proving the mathematical equality of debits and credits after posting.
40
What are the steps for preparing a trial balance?
The steps for preparing a trial balance are:
List the account titles and their balances.
Total the debit column and total the credit column.
Verify the equality of the two columns.
41
What is the order of presentation in a trial balance?
The order of presentation in a trial balance is:
Assets
Liabilities
Shareholders' equity
Revenues
Expenses
42
What are the limitations of a trial balance?
A trial balance does not prove that all transactions have been recorded or that the ledger is correct. It may balance even when certain errors are present, such as:
A transaction not being journalized.
A correct journal entry not being posted.
A journal entry being posted twice.
Incorrect accounts being used in journalizing or posting.
Offsetting errors in recording the amount of a transaction.
42
What is the significance of the trial balance in accounting?
The trial balance is significant because it verifies the equality of debits and credits after posting.
It is useful in the preparation of financial statements and may uncover errors in journalizing and posting.
43
Why is the trial balance still useful despite its limitations?
Despite its limitations, the trial balance is a useful screen for finding errors and is frequently used in practice.
44
What is the periodicity assumption in accounting?
The periodicity assumption divides the economic life of a business into artificial time periods, typically a month, a quarter, or a year.
45
What is the revenue recognition principle?
The revenue recognition principle requires that companies recognize revenue in the accounting period in which the performance obligation is satisfied, regardless of when the cash is received.
46
What is the expense recognition principle?
The expense recognition principle, also known as the matching principle, dictates that efforts (expenses) should be matched with the results (revenues) they help to generate.
47
How does the expense recognition principle apply to expenses related to revenue generation?
Under the expense recognition principle, expenses should be reported in the same period as the revenues they help to generate, even if the payment for those expenses occurs in a different period.
48
What is the relationship between the revenue recognition principle and the expense recognition principle?
Both the revenue and expense recognition principles are guided by the periodicity assumption and ensure that revenues and expenses are recognized in the appropriate accounting periods according to generally accepted accounting principles (GAAP).
49
What is accrual-basis accounting?
Accrual-basis accounting means that transactions that change a company's financial statements are recorded in the periods in which the events occur, even if cash was not exchanged.
Revenues are recognized when services are performed, and expenses are recognized when incurred.
50
What is cash-basis accounting?
Cash-basis accounting records revenue when cash is received and records expenses when cash is paid.
It often produces misleading financial statements and is not in accordance with generally accepted accounting principles (GAAP).
51
How does accrual-basis accounting differ from cash-basis accounting?
Accrual-basis accounting recognizes revenue when the performance obligation is satisfied and expenses when incurred, while cash-basis accounting recognizes revenue when cash is received and expenses when cash is paid, regardless of when the obligation or expense occurred.
52
Why is cash-basis accounting often considered misleading?
Cash-basis accounting can be misleading because it fails to record revenue in the period that a performance obligation is satisfied and may not reflect the true financial performance of the company, especially when there are delays in cash transactions.
53
What are the financial impacts of using accrual-basis accounting as shown in the example of Fresh Colours?
In 2019, Fresh Colours recognized $80,000 in revenue and $50,000 in expenses, resulting in a net income of $30,000.
If using cash-basis accounting, the revenue would not be recognized until 2020, leading to a misleading net loss of $50,000 in 2019 and a net income of $80,000 in 2020, misrepresenting the company's financial performance.
54
Why are adjusting entries necessary in accounting?
Adjusting entries are necessary to ensure that the revenue recognition and expense recognition principles are followed.
They update the trial balance to reflect up-to-date and complete data, which may not be recorded daily or during the accounting period.
55
What are the three reasons why certain events may not be recorded in the trial balance?
Some events are not recorded daily because it is not efficient (e.g., the use of supplies and earning of wages).
Some costs are not recorded during the accounting period because they expire with time rather than as a result of recurring daily transactions (e.g., rent, insurance).
Some items may be unrecorded, such as a utility service bill that will not be received until the next accounting period.
56
When are adjusting entries required?
Adjusting entries are required every time a company prepares financial statements to ensure that all accounts are up-to-date for financial statement purposes.
Every adjusting entry will include one income statement account and one balance sheet account.
57
What are the two main categories of adjusting entries?
Adjusting entries are classified as either deferrals or accruals.
58
What are the two subcategories of deferrals?
**Prepaid expenses**: Expenses paid in cash before they are used or consumed.
**Unearned revenues**: Cash received before services are performed.
59
What are the two subcategories of accruals?
**Accrued revenues**: Revenues for services performed but not yet received in cash or recorded.
**Accrued expenses**: Expenses incurred but not yet paid in cash or recorded.
60
What are prepaid expenses in accounting?
Prepaid expenses, or prepayments, are expenses paid in cash before they are used or consumed.
These are recorded as an asset, which is later expensed as the benefit is received over time.
61
How do prepaid expenses expire, and how are they adjusted?
Prepaid expenses expire either with the passage of time (e.g., rent, insurance) or through use (e.g., supplies).
Adjusting entries for prepaid expenses are made at the end of the accounting period to record the expenses applicable to the current period and to show the remaining amounts as assets.
62
What is the impact of an adjusting entry for prepaid expenses on the financial statements?
An adjusting entry for prepaid expenses results in an increase (debit) to an expense account and a decrease (credit) to an asset account, thereby accurately reflecting the expenses incurred during the period.
63
How is the adjustment for supplies calculated and recorded?
The adjustment for supplies is calculated by subtracting the cost of supplies on hand from the unadjusted balance in the supplies account.
For example, if Sierra Corporation had $2,500 in supplies and only $1,000 remains, the adjusting entry would be:
64
What are the consequences of not making the adjusting entry for supplies?
If the adjusting entry for supplies is not made, expenses will be understated by $1,500, and net income will be overstated by $1,500.
Additionally, both assets and shareholders' equity will be overstated by $1,500 on the balance sheet.
65
How are insurance payments recorded in accounting?
Insurance payments made in advance are recorded as an asset in the account "Prepaid Insurance."
At the end of each period, the portion of the insurance that has expired is recorded as an expense.
66
What happens when prepaid insurance expires?
When prepaid insurance expires, an adjusting entry is made to decrease (credit) the Prepaid Insurance account and increase (debit) the Insurance Expense account to reflect the expired portion of the insurance.
67
How is the adjustment for insurance recorded?
The adjustment for insurance is recorded as:
Insurance Expense 50
Prepaid Insurance 50
68
What are the consequences of not adjusting for expired insurance?
If the adjustment is not made, October expenses will be understated by $50, and net income will be overstated by $50.
Additionally, both assets and shareholders' equity will be overstated by $50 on the balance sheet.
69
What is depreciation in accounting?
Depreciation is the process of allocating the cost of a long-lived asset, such as buildings, equipment, and motor vehicles, to expense over its useful life.
It is an allocation concept, not a valuation concept, and is necessary to follow the expense recognition principle.
70
How is depreciation recorded?
Depreciation is recorded by increasing (debiting) the Depreciation Expense account and increasing (crediting) a contra asset account called Accumulated Depreciation.
This contra account offsets the related asset account on the balance sheet.
71
What is a contra asset account, and how is it used in depreciation?
A contra asset account, such as Accumulated Depreciation—Equipment, is used to offset the related asset account on the balance sheet.
It tracks the total amount of depreciation expense taken over the life of the asset.
72
What is the impact of not making an adjusting entry for depreciation?
Without the adjusting entry, total assets, total shareholders' equity, and net income are overstated by the amount of the unrecorded depreciation expense, and depreciation expense is understated.
73
How is the balance sheet affected by accumulated depreciation?
The balance sheet presentation shows the original cost of the asset less the accumulated depreciation. For example:
Equipment $5,000
Less: Accumulated Depreciation 40
$4,960
74
How is depreciation expense recognized monthly?
For example, if depreciation is $480 per year, it is recognized at $40 per month. The journal entry for October would be:
Depreciation Expense 40
Accumulated Depreciation—Equipment 40
75
What are unearned revenues in accounting?
Unearned revenues refer to cash received by a company before services are performed.
This is recorded as a liability under "Unearned Revenues" because the company has an obligation to perform the service in the future.
76
How is unearned revenue recorded when cash is received?
When cash is received in advance, it is recorded as a liability in the "Unearned Revenues" account. For example:
Cash 1,200
Unearned Revenues 1,200
77
What happens to unearned revenues when services are performed?
When the service is performed, an adjusting entry is made to decrease the unearned revenue liability and increase the revenue account. For example:
Unearned Revenue 400
Service Revenue 400
78
What is the impact of not adjusting unearned revenues?
Without the adjustment, revenues and net income are understated by the amount of the earned revenue, and liabilities are overstated. This misstatement can affect the accuracy of the financial statements.
79
How does the adjusting entry for unearned revenues affect the financial statements?
The adjusting entry for unearned revenues decreases the liability account (Unearned Revenues) and increases the revenue account (Service Revenue), thereby correctly reflecting the revenue earned during the period.
80
What are accrued revenues?
Accrued revenues are revenues for services performed but not yet recorded at the statement date.
They accumulate (accrue) over time and are recorded when services are performed but not yet billed or collected.
81
How is accrued revenue recorded when services are performed but not yet billed?
When services are performed but not yet billed, the accrued revenue is recorded by increasing (debiting) an asset account (Accounts Receivable) and increasing (crediting) a revenue account (Service Revenue). For example:
Accounts Receivable 200
Service Revenue 200
82
What is the impact of not recording accrued revenues?
Without recording accrued revenues, both assets and revenues are understated on the financial statements, leading to an inaccurate representation of the company's financial position.
83
What is the journal entry when cash is received for previously accrued revenue?
When cash is received for previously accrued revenue, the entry involves debiting Cash and crediting Accounts Receivable. For example:
Cash 200
Accounts Receivable 200
84
What is the significance of adjusting entries for accrued revenues?
Adjusting entries for accrued revenues ensure that revenues earned during a period are recorded in the correct accounting period, providing a more accurate picture of the company's financial performance and position.
85
What are accrued expenses?
Accrued expenses are expenses incurred but not yet paid or recorded at the statement date. Common examples include interest, taxes, utilities, and salaries.
86
How are accrued expenses adjusted in accounting?
An adjusting entry for accrued expenses results in an increase (a debit) to an expense account and an increase (a credit) to a liability account.
87
What are accrued expenses?
Accrued expenses are expenses incurred but not yet paid or recorded at the statement date. Common examples include interest, taxes, utilities, and salaries.
88
How are accrued expenses adjusted in accounting?
An adjusting entry for accrued expenses results in an increase (a debit) to an expense account and an increase (a credit) to a liability account.
89
What is the formula for calculating interest on a note payable?
Interest = Face Value of Note × Annual Interest Rate × (Time in Terms of One Year)
90
How do you calculate interest for Sierra Corporation’s $5,000 note payable with a 12% annual interest rate for one month?
Interest = 5,000 × 12% × (1/12) = 50
91
What is the adjusting entry for accrued interest?
The adjusting entry for accrued interest involves debiting Interest Expense and crediting Interest Payable.
92
What is the effect of not making the adjusting entry for accrued interest?
Without this adjusting entry, liabilities and interest expense are understated, and net income and shareholders' equity are overstated.
93
What are accrued salaries?
Accrued salaries are expenses for employee salaries and wages that have been incurred after the services have been performed but have not yet been paid or recorded by the statement date.
94
How do you calculate the accrued salaries at the end of October if three working days remain unpaid?
Accrued Salaries = Daily Salary × Number of Unpaid Days
Accrued Salaries = 400 × 3 = 1,200
95
What is the adjusting entry for accrued salaries?
The adjusting entry for accrued salaries involves debiting Salaries and Wages Expense and crediting Salaries and Wages Payable.
96
What is the effect of not making the adjusting entry for accrued salaries?
Without the $1,200 adjustment for salaries, Sierra's expenses are understated by $1,200, and its liabilities are understated by $1,200.
97
What is the journal entry made on the next payday to record the payroll for both accrued and current salaries?
Salaries and Wages Payable 1,200
Salaries and Wages Expense 2,800
Cash 4,000
(To record November 9 payroll)
98
What is the summary of accounting for accrued expenses?
Accrued expenses are incurred expenses that have not yet been paid in cash or recorded.
Without adjusting entries, expenses are understated, and liabilities are understated.
The adjusting entry requires debiting expenses and crediting liabilities.
99
What are the four basic types of adjusting entries?
The four basic types of adjusting entries are:
Prepaid expenses
Unearned revenues
Accrued revenues
Accrued expenses
100
What is the effect of not adjusting prepaid expenses?
If prepaid expenses are not adjusted, assets will be overstated, and expenses will be understated. The adjusting entry involves:
Dr. Expenses
Cr. Assets or Contra Assets
101
What is the effect of not adjusting unearned revenues?
If unearned revenues are not adjusted, liabilities will be overstated, and revenues will be understated. The adjusting entry involves:
Dr. Liabilities
Cr. Revenues
102
What is the effect of not adjusting accrued revenues?
If accrued revenues are not adjusted, assets will be understated, and revenues will be understated. The adjusting entry involves:
Dr. Assets
Cr. Revenues
103
What is the effect of not adjusting accrued expenses?
If accrued expenses are not adjusted, expenses will be understated, and liabilities will be understated. The adjusting entry involves:
Dr. Expenses
Cr. Liabilities
104
What is the purpose of adjusting entries in the general journal?
Adjusting entries are used to update account balances before preparing financial statements, ensuring that all revenues and expenses are recorded in the period in which they are incurred.
105
How do you record the adjustment for supplies used during the period?
Supplies Expense 1,500
Supplies 1,500
(To record supplies used)
106
How do you record the adjustment for insurance expired during the period?
Insurance Expense 50
Prepaid Insurance 50
(To record insurance expired)
107
How do you record the adjustment for monthly depreciation?
Depreciation Expense 40
Accumulated Depreciation—Equipment 40
(To record monthly depreciation)
108
How do you record the adjustment for revenue earned but not yet received (accrued revenue)?
Accounts Receivable 200
Service Revenue 200
(To record revenue for services performed)
109
How do you record the adjustment for interest accrued on notes payable?
Interest Expense 50
Interest Payable 50
(To record interest on notes payable)
110
How do you record the adjustment for accrued salaries?
Salaries and Wages Expense 1,200
Salaries and Wages Payable 1,200
(To record accrued salaries)
111
What is an adjusted trial balance?
An adjusted trial balance is a trial balance prepared after all adjusting entries have been journalized and posted.
It shows the balances of all accounts, including those adjusted, at the end of the accounting period.
The purpose of the adjusted trial balance is to prove the equality of total debit and credit balances in the ledger after adjustments.
112
Why is the adjusted trial balance important?
The adjusted trial balance is the primary basis for the preparation of financial statements, as it contains all the data needed for financial reporting.
113
How do you prove the equality of the adjusted trial balance?
The equality of the adjusted trial balance is proven by ensuring that the total debits equal the total credits.
114
What does the adjusted trial balance for Sierra Corporation as of October 31, 2020, show?
The adjusted trial balance for Sierra Corporation shows total debits and credits both equal to $30,190.
115
What are the primary components of an adjusted trial balance?
The primary components of an adjusted trial balance include all assets, liabilities, and equity accounts, as well as all revenue and expense accounts, adjusted for any entries made at the end of the accounting period.
116
What is the next step after preparing an adjusted trial balance?
The next step after preparing an adjusted trial balance is to prepare the financial statements.
117
How can companies prepare financial statements directly from an adjusted trial balance?
Companies can prepare financial statements directly from an adjusted trial balance by deriving the income statement from the revenue and expense accounts and the statement of retained earnings from the Retained Earnings account, Dividends account, and net income.
The balance sheet is prepared using the asset, liability, and shareholders' equity accounts, incorporating the ending balance from the statement of retained earnings.
118
What is the relationship between the adjusted trial balance and the financial statements?
The adjusted trial balance provides the necessary data to prepare financial statements.
Each account in the adjusted trial balance is used to prepare the income statement, statement of retained earnings, and balance sheet, ensuring that all financial data is accurately reported.
119
How do you prepare the income statement from the adjusted trial balance?
The income statement is prepared by listing the revenues and subtracting the total expenses from the adjusted trial balance.
The result is the net income for the period.
120
How do you prepare the statement of retained earnings from the adjusted trial balance?
The statement of retained earnings starts with the retained earnings at the beginning of the period (often $0 if it's the first period), adds net income from the income statement, subtracts dividends, and results in the retained earnings at the end of the period.
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How do you prepare the balance sheet from the adjusted trial balance?
The balance sheet is prepared by listing the assets, liabilities, and shareholders' equity accounts from the adjusted trial balance.
Total assets should equal the sum of total liabilities and shareholders' equity.
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What is the significance of the retained earnings balance on the balance sheet?
The retained earnings balance on the balance sheet is derived from the statement of retained earnings and represents the accumulated earnings of the company after dividends are paid.
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What is the purpose of closing entries in accounting?
The purpose of closing entries is to transfer the balances of temporary accounts (revenues, expenses, and dividends) to a permanent equity account, Retained Earnings.
This process resets the balances of temporary accounts to zero, preparing them to accumulate data in the next accounting period.
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What is the difference between temporary and permanent accounts?
Temporary accounts include all revenue accounts, all expense accounts, and dividends.
These accounts relate to a specific accounting period and are closed at the end of the period.
Permanent accounts include all asset accounts, all liability accounts, and shareholders' equity accounts.
These accounts are not closed at the end of the period; their balances are carried forward into the next accounting period.
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How are revenue accounts closed in the closing process?
Revenue accounts are closed by debiting each revenue account and crediting the Income Summary account.
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How are expense accounts closed in the closing process?
Expense accounts are closed by crediting each expense account and debiting the Income Summary account.
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How is the Income Summary account closed in the closing process?
The Income Summary account is closed by transferring the net income or net loss to Retained Earnings. If there's net income, the entry is:
Income Summary XXX
Retained Earnings XXX
If there's a net loss, the entry is reversed.
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How is the Dividends account closed in the closing process?
The Dividends account is closed by debiting Retained Earnings and crediting Dividends.
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What is the result of posting closing entries?
Posting closing entries results in a zero balance in each temporary account (revenues, expenses, and dividends), allowing these accounts to be ready to accumulate data for the next accounting period.
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What is the Income Summary account, and why is it used?
The Income Summary account is a temporary account used during the closing process to summarize revenues and expenses.
The balance in Income Summary represents the net income or net loss for the period and is transferred to Retained Earnings.
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What is a post-closing trial balance?
A post-closing trial balance is a list of all permanent accounts and their balances after closing entries are journalized and posted.
Its purpose is to prove the equality of the total debit and credit balances of the permanent account balances that the company carries forward into the next accounting period.
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What accounts are included in the post-closing trial balance?
The post-closing trial balance includes only permanent accounts, such as assets, liabilities, and shareholders' equity accounts.
Temporary accounts (revenues, expenses, dividends) are not included as they have been closed to Retained Earnings.
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Why are only permanent accounts listed on the post-closing trial balance?
Only permanent accounts are listed on the post-closing trial balance because temporary accounts (revenues, expenses, dividends) have been closed out and have zero balances.
The permanent accounts carry forward into the next accounting period.
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What is the main purpose of preparing a post-closing trial balance?
The main purpose of preparing a post-closing trial balance is to ensure that total debits equal total credits for the permanent accounts after all closing entries have been made.
This helps verify the accuracy of the ledger and readiness for the next accounting period.
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How does the post-closing trial balance differ from the adjusted trial balance?
The adjusted trial balance includes both permanent and temporary accounts with their adjusted balances, whereas the post-closing trial balance includes only permanent accounts after the closing entries have been posted.
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