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