Intermediate Accounting by Kieso, Ch. 3

collects and processes transaction data and then disseminates the financial information to interested parties

accounting information system

How much and what kind of debt is outstanding?; Were our sales higher this period than last?; What assets do we have?; What were our cash inflows and outflows?; Did we make a profit last period?; Are any of our product lines or divisions operating at a lo

What kinds of questions do a good accounting information system help managers answer?

A happening of consequence. An event generally is the source or cause of changes in assets, liabilities, and equity. Events may be external or internal.

event

An external event involving a transfer or exchange between two or more entities.

transaction

A systematic arragement that shows the effect of transactions and other events on a specific element (asset, liability, and so on). Companies keep a separate account for each asset, liability, revenue, and expense, and for capital (owner's equity). Becaus

account

Real (permanent) accounts are asset, liability, and equity accounts; they appear on the balance sheet, and they are not closed periodically.

real accounts

Nominal (temporary) accounts are revenue, expense, and dividend accounts; except for dividends, they appear on the income statement. Companies periodically close nominal accounts.

nominal accounts

real and nominal accounts

What are the two kinds of accounts?

The book (or computer printouts) containing the accounts. A general ledger is a collection of all the asset, liability, owner's equity, revenue, and expense accounts. A subsidiary ledger contains the details related to a given general ledger account.

ledger

The "book of original entry" where the company initially records transactions and selected other events. Various amounts are transferred from the book of original entry, the journal, to the ledger. Entering transaction data in the journal is known as jour

journal

The process of transferring the essential facts and figures from the book of original entry to the ledger accounts.

posting

The list of all open accounts in the ledger and their balances. The trial balance taken immediately after all adjustments have been posted is called an adjusted trial balance. A trial balance taken immediately after closing entries have been posted is cal

trial balance

Entries made at the end of an accounting period to bring all accounts up to date on an accrual basis, so that the company can prepare correct financial statements.

adjusting entries

Statements that reflect the collection, tabulation, and final summarization of the accounting data. Four statements are involved: (1) The income statement measures the results of operations during the period. (2) The statement of retained earnings reconci

financial statements

The formal process by which the enterprise reduces all nominal accounts to zero and determines and transfers the net income or net loss to an owners' equity account. Also known as "closing the ledger," "closing the books," or merely "closing.

closing entries

when comparing the total of two sides, an accounting shows a debit balance if the total of the debit amounts exceeds the credits

debit balance

when the credit amounts exceed the debits

credit balance

Under the universally used double-entry accounting system, a company records the dual (two-sided) effect of each transaction in appropriate accounts.

double-entry accounting

(1) Names of accounts involved, (2) classify the accounts, (3) does the account + or -, (4) Assets = liabilities + Stockholder's Equity, (5) Increase all accounts on the balance side, decrease all accounts on the side opposite of the balance side, (6) Deb

What are the steps involved in analyzing a business transaction?

Assets + Expenses + Dividends + Treasury Stock = Liabilities + Paid-in Capital + Revenues

What's the expanded accounting equation for corporations?

Assets + Expenses + Owner's Draws = Liabilities + Owner's Capital + Revenues

What is the expanded accounting equation for a sole proprietorship?

Assets = Liabilities + Owner's Equity

What's the basic accounting equation for a sole proprietorship?

Assets = Liabilities + Stockholders' Equity

What's the basic accounting equation for a corporation?

stockholders' equity

The __ section of the balance sheet reports common stock and retained earnings.

income statement

The ___ reports revenues and expenses.

dividends, revenues, and expenses

Because a company transfers ___ to retained earnings at the end of the period, a change i nany one of these three items affects stockholder's equity.

Common Stock, Additional Paid-in Capital, Dividends, and Retained Earnings

What are some account names corporations usually use that are a part of or affect the equity section?

Capital, Drawing

What are some account names proprietorships usually use that are a part of or affect the equity section?

it is an element, is measurable, and is relevant and reliable.

An item should be recognized in the financial statements if ____

(1) External events involve interaction between an entity and its environment; (2) Internal events occur within an entity

What are the two types of events?

as many events as possible that affect its financial position.

An enterprise records __

transactions and events that affect its assets, liabilities, and equities.

A company records in accounts those ___

all the asset, liability, and stockholder's equity accounts.

The general ledger contains ___

summarize transactions possessing a common characteristic, thus reducing bookkeeping time

special journals

when a company (1) fails to journalize a transaction, (2) omits posting a correct journal entry, (3) posts a journal entry twice, (4) uses incorrect accounts in journalizing or posting, or (5) makes offsetting errors in recording the amount of a transacti

What are some reasons that a trial balance may balance even when the ledger is incorrect?

Adjusting entries

__ ensure that the revenue recognition and matching principles are being followed.

(1) some events are not journalized daily because it is not expedient (i.e., consumption of supplies and earnings of wages by employees); (2) Some costs are not journalized during the accounting period because these costs expire with the passage of time r

What are some reasons why the original trial balance may not contain up-to-date and complete data, i.e., that adjusting entries are needed?

deferrals and accruals

What are the two types of adjusting entries?

prepaid expenses and unearned revenues

What are the two subcategories of deferrals?

accrued revenues and accrued expenses

What are the two subcategories of accruals?

Expenses paid in cash and recorded as assets before they are used or consumed.

prepaid expenses

Revenues received in cash and recorded as liabilities before they are earned.

unearned revenues

Revenues earned but not yet received in cash or recorded.

accrued revenues

Expenses incurred but not yet paid in cash or recorded.

accrued expenses

The difference between the balance in the Supplies (asset) account and the cost of supplies on hand represents the supplies used (expense) for the period.

How is the cost of supplies calculated?

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

depreciation

a long-term prepayment for services.

GAAP views the acquisition of productive facilities as ___

divide the cost of the asset by its estimated useful life

What's the formula for depreciation?

offsets an asset account on the balance sheet

contra asset account

the difference between its cost and its related accumulated depreciation.

The book value of any depreciable asset is __

because depreciation is not a matter of valuation but rather a means of cost allocation

Why are the asset's book value generally different from its market value?

revenues received in cash and recorded as liabilities before a company earns them

unearned revenues

debit (decrease) to a liability account and a credit (increase) to a revenue account.

The adjusting entry for unearned revenues results in a ___

both a balance sheet and an income statement account.

The adjusting entry for accruals will increase __

revenues earned but not yet received in cash or recorded at the statement date

accrued revenues

in a debit (increase) to an asset account and a credit (increase) to a revenue account.

An adjusting entry for accrued revenues results ___

expenses incurred but yet paid or recorded at the statement date

accrued expenses

a debit (increase) to an expense account and a credit (increase) to a liability account.

The adjusting entry for accrued expenses results in __

all revenue and expense accounts

What accounts in the adjusted trial balance go on the income statement?

all retained earnings and dividends accounts, and the net income (or net loss)

What accounts in the adjusted trial balance go on the retained earnings statement?

the asset, liability, and common stock accounts, and the ending retained earnings balance as reported in the retained earnings statement

What accounts in the adjusted trial balance go on the balance sheet?

reduces the balance of nominal (temporary) accounts to zero in order to prepare the accounts for the next period's transactions

the closing process

Income Summary, or Expense and Revenue Summary

What's the clearing account used in closing the books?

Income Summary, or Expense and Revenue Summary

What account represents the net income or net loss for the period?

post-closing trial balance; only of asset, liability, and owners' equity accounts - the real accounts.

The trial balance after closing, called __, consists __

(1) Journalize; (2) Post to the ledger; (3) Trial Balance; (4) Journalize and post adjusting entries; (5) Prepare an adjusted trial balance; (6) Prepare financial statements (income statement, statement of retained earnings, and balance sheet); (7) Journa

the accounting cycle

at the beginning of the next accounting period

When are reversing entries made?

a company may reverse some of the adjusting entries before recording regular transactions of the next period

reversing entries

a mixture of the cash basis and the accrual basis - often followed by professional services firms (doctors, lawyers, accountants, consultants) and retail, real estate, and agricultural operations

modified cash basis

Accounts receivable, unearned service revenue, accrued liabilities, prepaid expenses

What accounts are generally involved in converting a cash basis to an accrual basis?

Cash receipts from customers - beginning accounts receivable + ending accounts receivable + beginning unearned service revenue - ending unearned service revenue = the accrual service revenue

What's the equation for finding the accrual service revenue of a cash basis enterprise?

Cash paid for operating expenses + beginning prepaid expense - ending prepaid expense - beginning accrued liabilities + ending accrued liabilities = accrual operating expenses

What's the equation for find the accrual operating expenses of a cash basis enterprise?

simplifies; amounts reported; previous period

Use of reversing entries ___ the recording transaction in the next accounting period. The use of reversing entries, however, does not change the ___ in the financial statements for the __

accrued revenues and accrued expenses

What two types of adjusting entries do companies most often use reversing entries to reverse?

Office Supplies Expense; reversing entry; expense account; cost of unconsumed supplies

If the company initially debits __ when it purchases the supplies, it then makes a __ to return to the __ the ___

(1) All accruals should be reversed; (2) All deferrals for which a company debited or credited the original cash transaction to an expense or revenue account should be reversed; (3) Adjusting entries for depreciation and bad debts are not reversed; (4) re

How can we summarize the reversing entries?

Another difference between the two approaches is that the perpetual system directly adjusts the Merchandise Inventory account for any transaction that affects inventory (such as freight costs, returns, and discounts). The periodic system instead creates d

What's another difference between the perpetual and periodic systems?

the form of presentation in the balance sheet.

The use of the periodic inventory system does not affect __

collects and processes transaction data and then disseminates the financial information to interested parties

accounting information system

How much and what kind of debt is outstanding?; Were our sales higher this period than last?; What assets do we have?; What were our cash inflows and outflows?; Did we make a profit last period?; Are any of our product lines or divisions operating at a lo

What kinds of questions do a good accounting information system help managers answer?

A happening of consequence. An event generally is the source or cause of changes in assets, liabilities, and equity. Events may be external or internal.

event

An external event involving a transfer or exchange between two or more entities.

transaction

A systematic arragement that shows the effect of transactions and other events on a specific element (asset, liability, and so on). Companies keep a separate account for each asset, liability, revenue, and expense, and for capital (owner's equity). Becaus

account

Real (permanent) accounts are asset, liability, and equity accounts; they appear on the balance sheet, and they are not closed periodically.

real accounts

Nominal (temporary) accounts are revenue, expense, and dividend accounts; except for dividends, they appear on the income statement. Companies periodically close nominal accounts.

nominal accounts

real and nominal accounts

What are the two kinds of accounts?

The book (or computer printouts) containing the accounts. A general ledger is a collection of all the asset, liability, owner's equity, revenue, and expense accounts. A subsidiary ledger contains the details related to a given general ledger account.

ledger

The "book of original entry" where the company initially records transactions and selected other events. Various amounts are transferred from the book of original entry, the journal, to the ledger. Entering transaction data in the journal is known as jour

journal

The process of transferring the essential facts and figures from the book of original entry to the ledger accounts.

posting

The list of all open accounts in the ledger and their balances. The trial balance taken immediately after all adjustments have been posted is called an adjusted trial balance. A trial balance taken immediately after closing entries have been posted is cal

trial balance

Entries made at the end of an accounting period to bring all accounts up to date on an accrual basis, so that the company can prepare correct financial statements.

adjusting entries

Statements that reflect the collection, tabulation, and final summarization of the accounting data. Four statements are involved: (1) The income statement measures the results of operations during the period. (2) The statement of retained earnings reconci

financial statements

The formal process by which the enterprise reduces all nominal accounts to zero and determines and transfers the net income or net loss to an owners' equity account. Also known as "closing the ledger," "closing the books," or merely "closing.

closing entries

when comparing the total of two sides, an accounting shows a debit balance if the total of the debit amounts exceeds the credits

debit balance

when the credit amounts exceed the debits

credit balance

Under the universally used double-entry accounting system, a company records the dual (two-sided) effect of each transaction in appropriate accounts.

double-entry accounting

(1) Names of accounts involved, (2) classify the accounts, (3) does the account + or -, (4) Assets = liabilities + Stockholder's Equity, (5) Increase all accounts on the balance side, decrease all accounts on the side opposite of the balance side, (6) Deb

What are the steps involved in analyzing a business transaction?

Assets + Expenses + Dividends + Treasury Stock = Liabilities + Paid-in Capital + Revenues

What's the expanded accounting equation for corporations?

Assets + Expenses + Owner's Draws = Liabilities + Owner's Capital + Revenues

What is the expanded accounting equation for a sole proprietorship?

Assets = Liabilities + Owner's Equity

What's the basic accounting equation for a sole proprietorship?

Assets = Liabilities + Stockholders' Equity

What's the basic accounting equation for a corporation?

stockholders' equity

The __ section of the balance sheet reports common stock and retained earnings.

income statement

The ___ reports revenues and expenses.

dividends, revenues, and expenses

Because a company transfers ___ to retained earnings at the end of the period, a change i nany one of these three items affects stockholder's equity.

Common Stock, Additional Paid-in Capital, Dividends, and Retained Earnings

What are some account names corporations usually use that are a part of or affect the equity section?

Capital, Drawing

What are some account names proprietorships usually use that are a part of or affect the equity section?

it is an element, is measurable, and is relevant and reliable.

An item should be recognized in the financial statements if ____

(1) External events involve interaction between an entity and its environment; (2) Internal events occur within an entity

What are the two types of events?

as many events as possible that affect its financial position.

An enterprise records __

transactions and events that affect its assets, liabilities, and equities.

A company records in accounts those ___

all the asset, liability, and stockholder's equity accounts.

The general ledger contains ___

summarize transactions possessing a common characteristic, thus reducing bookkeeping time

special journals

when a company (1) fails to journalize a transaction, (2) omits posting a correct journal entry, (3) posts a journal entry twice, (4) uses incorrect accounts in journalizing or posting, or (5) makes offsetting errors in recording the amount of a transacti

What are some reasons that a trial balance may balance even when the ledger is incorrect?

Adjusting entries

__ ensure that the revenue recognition and matching principles are being followed.

(1) some events are not journalized daily because it is not expedient (i.e., consumption of supplies and earnings of wages by employees); (2) Some costs are not journalized during the accounting period because these costs expire with the passage of time r

What are some reasons why the original trial balance may not contain up-to-date and complete data, i.e., that adjusting entries are needed?

deferrals and accruals

What are the two types of adjusting entries?

prepaid expenses and unearned revenues

What are the two subcategories of deferrals?

accrued revenues and accrued expenses

What are the two subcategories of accruals?

Expenses paid in cash and recorded as assets before they are used or consumed.

prepaid expenses

Revenues received in cash and recorded as liabilities before they are earned.

unearned revenues

Revenues earned but not yet received in cash or recorded.

accrued revenues

Expenses incurred but not yet paid in cash or recorded.

accrued expenses

The difference between the balance in the Supplies (asset) account and the cost of supplies on hand represents the supplies used (expense) for the period.

How is the cost of supplies calculated?

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

depreciation

a long-term prepayment for services.

GAAP views the acquisition of productive facilities as ___

divide the cost of the asset by its estimated useful life

What's the formula for depreciation?

offsets an asset account on the balance sheet

contra asset account

the difference between its cost and its related accumulated depreciation.

The book value of any depreciable asset is __

because depreciation is not a matter of valuation but rather a means of cost allocation

Why are the asset's book value generally different from its market value?

revenues received in cash and recorded as liabilities before a company earns them

unearned revenues

debit (decrease) to a liability account and a credit (increase) to a revenue account.

The adjusting entry for unearned revenues results in a ___

both a balance sheet and an income statement account.

The adjusting entry for accruals will increase __

revenues earned but not yet received in cash or recorded at the statement date

accrued revenues

in a debit (increase) to an asset account and a credit (increase) to a revenue account.

An adjusting entry for accrued revenues results ___

expenses incurred but yet paid or recorded at the statement date

accrued expenses

a debit (increase) to an expense account and a credit (increase) to a liability account.

The adjusting entry for accrued expenses results in __

all revenue and expense accounts

What accounts in the adjusted trial balance go on the income statement?

all retained earnings and dividends accounts, and the net income (or net loss)

What accounts in the adjusted trial balance go on the retained earnings statement?

the asset, liability, and common stock accounts, and the ending retained earnings balance as reported in the retained earnings statement

What accounts in the adjusted trial balance go on the balance sheet?

reduces the balance of nominal (temporary) accounts to zero in order to prepare the accounts for the next period's transactions

the closing process

Income Summary, or Expense and Revenue Summary

What's the clearing account used in closing the books?

Income Summary, or Expense and Revenue Summary

What account represents the net income or net loss for the period?

post-closing trial balance; only of asset, liability, and owners' equity accounts - the real accounts.

The trial balance after closing, called __, consists __

(1) Journalize; (2) Post to the ledger; (3) Trial Balance; (4) Journalize and post adjusting entries; (5) Prepare an adjusted trial balance; (6) Prepare financial statements (income statement, statement of retained earnings, and balance sheet); (7) Journa

the accounting cycle

at the beginning of the next accounting period

When are reversing entries made?

a company may reverse some of the adjusting entries before recording regular transactions of the next period

reversing entries

a mixture of the cash basis and the accrual basis - often followed by professional services firms (doctors, lawyers, accountants, consultants) and retail, real estate, and agricultural operations

modified cash basis

Accounts receivable, unearned service revenue, accrued liabilities, prepaid expenses

What accounts are generally involved in converting a cash basis to an accrual basis?

Cash receipts from customers - beginning accounts receivable + ending accounts receivable + beginning unearned service revenue - ending unearned service revenue = the accrual service revenue

What's the equation for finding the accrual service revenue of a cash basis enterprise?

Cash paid for operating expenses + beginning prepaid expense - ending prepaid expense - beginning accrued liabilities + ending accrued liabilities = accrual operating expenses

What's the equation for find the accrual operating expenses of a cash basis enterprise?

simplifies; amounts reported; previous period

Use of reversing entries ___ the recording transaction in the next accounting period. The use of reversing entries, however, does not change the ___ in the financial statements for the __

accrued revenues and accrued expenses

What two types of adjusting entries do companies most often use reversing entries to reverse?

Office Supplies Expense; reversing entry; expense account; cost of unconsumed supplies

If the company initially debits __ when it purchases the supplies, it then makes a __ to return to the __ the ___

(1) All accruals should be reversed; (2) All deferrals for which a company debited or credited the original cash transaction to an expense or revenue account should be reversed; (3) Adjusting entries for depreciation and bad debts are not reversed; (4) re

How can we summarize the reversing entries?

Another difference between the two approaches is that the perpetual system directly adjusts the Merchandise Inventory account for any transaction that affects inventory (such as freight costs, returns, and discounts). The periodic system instead creates d

What's another difference between the perpetual and periodic systems?

the form of presentation in the balance sheet.

The use of the periodic inventory system does not affect __