Accounting 101 - Ch. 3 & 4

Explain the time period assumption.

The time period assumption assumes that the economic life of a business is divided into artificial time periods.

Explain the accrual basis of accounting.

Accrual-basis accounting means that companies record events that

Explain the reasons for adjusting entries.

Companies make adjusting entries at the end of an accounting period.Such entries ensure that companies record revenues in the period in which they are earned and that they recognize expenses in the period in which they are incurred.

Identify the major types of adjusting entries.

The major types of adjusting entries are deferrals -prepaid expenses and unearned revenues - , and accruals - accrued revenues and accrued expenses.

Prepare adjusting entries for deferrals

Deferrals are either prepaid expenses or unearned revenues. Companies make adjusting entries for deferrals to record the portion of the prepayment that represents the expense incurred or the revenue earned in the current accounting period.

Describe the nature and purpose of an adjusted trial
balance.

An adjusted trial balance shows the balances of all accounts, including those that have been adjusted, at the end of an accounting period. Its purpose is to prove the equality of the total debit balances and total credit balances in the ledger after all a

Accrual-basis accounting

Accounting basis in which companies record transactions that change a company's financial statements in the periods in which the events occur.

Accruals

Adjusting entries for either accrued revenues or accrued expenses

Accrued expenses

Expenses incurred but not yet paid in cash or recorded.

Accrued revenues

Revenues earned but not yet received in cash or recorded.

Adjusted trial balance

A list of accounts and their balances after the company has made all adjustments

Adjusting entries

Entries made at the end of an accounting period to ensure that companies follow the revenue recognition and matching principles

Book value

The difference between the cost of a depreciable asset and its related accumulated depreciation.

Calendar year

An accounting period that extends from January 1 to December 31.

Cash-basis accounting

Accounting basis in which companies record revenue when they receive cash and an expense when they pay cash.

Contra asset account

An account offset against an asset account on the balance sheet

Deferrals

Adjusting entries for either prepaid expenses or unearned revenues.

Depreciation

The allocation of the cost of an asset to expense over its useful life in a rational and systematic manner

Fiscal year

An accounting period that is one year in length.

Interim periods

Monthly or quarterly accounting time periods.

Matching principle

The principle that companies match efforts (expenses) with accomplishments (revenues).

Prepaid expenses

Expenses paid in cash that benefit more than one accounting period and that are recorded as assets.

Revenue recognition principle

The principle that companies recognize revenue in the accounting period in which it is earned.

Time period assumption

An assumption that accountants can divide the economic life of a business into artificial time periods

Unearned revenues

Cash received and recorded as liabilities before revenue is earned.

Useful life

The length of service of a long-lived asset

Chapter 4

Completing the Accounting Cycle

Prepare a worksheet.

The steps in preparing a worksheet are: (a) Prepare a trial balance on the worksheet. (b) Enter the adjustments in the adjustments columns. (c) Enter adjusted balances in the adjusted trial balance columns. (d) Extend adjusted trial balance amounts to app

Explain the process of closing the books

Closing the books occurs at the end of an accounting period.The process is to journalize and post closing entries and then rule and balance all accounts. In closing the books, companies make separate entries to close revenues and expenses to Income Summar

Describe the content and purpose of a post-closing trial balance.

A post-closing trial balance contains the balances in permanent accounts that are carried forward to the next accounting period. The purpose of this trial balance is to prove the equality of these balances.

State the required steps in the accounting cycle

The required steps in the accounting cycle are: (1) analyze business transactions, (2) journalize the transactions, (3) post to ledger accounts, (4) prepare a trial balance, (5 journalize and post adjusting entries, (6 prepare an adjusted trial balance, (

Explain the approaches to preparing correcting entries

One way to determine the correcting entry is to compare the incorrect entry with the correct entry. After comparison, the company makes a correcting entry to correct the accounts. An alternative to a correcting entry is to reverse the incorrect entry and

Identify the sections of a classified balance sheet.

A classified balance sheet categorizes assets as current assets;long-term investments; property, plant, and equipment; and intangibles. Liabilities are classified as either current or long-term. There is also a stockholders' (owners') equity section, whic

Classified balance sheet

A balance sheet that contains a number of standard classifications or sections

Closing entries

Entries made at the end of an accounting period to transfer the balances of temporary accounts to a permanent stockholders' equity account, Retained Earnings

Correcting entries

Entries to correct errors made in recording transactions.

Current assets

Assets that a company expects to convert to
cash or use up within one year

Current liabilities

Obligations that a company expects to pay
from existing current assets within the coming year

Income Summary

A temporary account used in closing revenue
and expense accounts

Intangible assets

Noncurrent assets that do not have physical
substance.

Liquidity

The ability of a company to pay obligations
expected to be due within the next year

Long-term investments

Generally, investments in stocks and bonds of other companies that companies normally
hold for many years. Also includes long-term assets, such as land and buillings, not currently being used in operations.

Long-term liabilities

Obligations that a company expects to pay after one year.

Operating cycle

The average time that it takes to go from cash to cash in producing revenues

Permanent (real) accounts

Accounts that relate to one or more accounting periods. Consist of all balance sheet accounts. Balances are carried forward to next accounting period.

Post-closing trial balance

A list of permanent accounts and their balances after a company has journalized and posted closing entries.

Property, plant, and equipment

Assets with relatively long useful lives, currently being used in operations

Reversing entry

An entry, made at the beginning of the next accounting period, that is the exact opposite of the adjusting entry made in the previous period

Stockholders' equity

The ownership claim of shareholders on total assets. It is to a corporation what owner's equity is to a proprietorship

Temporary (nominal) accounts

Accounts that relate only to a given accounting period. Consist of all income statement accounts and the Dividends account. All temporary accounts are closed at end of accounting period

Worksheet

A multiple-column form that may be used in making adjusting entries and in preparing financial statements.

Prepare reversing entries

Reversing entries are the opposite of the adjusting entries made in the preceding
period. Some companies choose to make reversing entries at the beginning of a new accounting period to simplify the recording of later transactions related to the adjusting