Financial Accounting 04

Accrual-basis accounting

Accounting basis in which companies record, in the periods in which the events occur, transactions that change a company's financial statements, even if cash was not exchanged.

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 all adjustments have been made.

Adjusting entries

Entries made at the end of an accounting period to ensure that the revenue recognition and matching principles are followed.

Book value

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

Cash-basis accounting

Accounting basis in which a company records revenue only when it receives cash, and an expense only when it pays cash.

Closing entries

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

Contra asset account

An account that is offset against an asset account on the balance sheet.

Depreciation

The process of allocating the cost of an asset to expense over its useful life.

Earnings management

The planned timing of revenues, expenses, gains, and losses to smooth out bumps in net income.

Fiscal year

An accounting period that is one year long.

Income Summary

A temporary account used in closing revenue and expense accounts.

Matching principle

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

Permanent accounts

Balance sheet accounts whose balances are carried forward to the next accounting period.

Post-closing trial balance

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

Prepaid expenses (Prepayments)

Assets that result from the payment of expenses that benefit more than one accounting period.

Quality of earnings

Indicates the level of full and transparent information that a company provides to users of its financial statements.

Revenue recognition principle

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

Reversing entry

An entry made at the beginning of the next accounting period; the exact opposite of the adjusting entry made in the previous period.

Temporary accounts

Revenue, expense, and dividend accounts whose balances a company transfers to Retained Earnings at the end of an accounting period.

Time period assumption

An assumption that the economic life of a business can be divided into artificial time periods.

Unearned revenues

Cash received before a company earns revenues and recorded as a liability until earned.

Useful life

The length of service of a productive asset.

Worksheet

A multiple-column form that companies may use in the adjustment process and in preparing financial statements.

Prepaid Expense Adjusting Entry

Dr. Expenses
Cr. Assets

Depreciation expense Adjusting Entry

Dr. Depreciation Expense
Cr. Accumulated Depreciation

Unearned Revenues Adjusting Entry

Dr. Liabilities
Cr. Revenues

Accrued revenues Adjusting Entry

Dr. Assets
Cr. Revenues

Accrued expenses Adjusting Entry

Dr. Expenses
Cr. Liabilities

Closing entries posting steps

1. Close the revenue accounts to the Income Summary account.
2. Close the expense accounts to the Income Summary account.
3. Close the Income Summary account to Retained Earnings.
4. Close Dividends to Retained Earnings.

Closing Entries, step 1: Close the revenue accounts to the Income Summary account.

-DR revenue; CR Income Summary

Closing Entries, step 2: Close the expense accounts to the Income Summary account.

- DR Income Summary; CR Expense accounts

Closing Entries, step 3: Close the Income Summary account to Retained Earnings.

- If Net Loss: DR Retained Earnings; CR Income Summary
- If Net Income: DR Income Summary; CR Retained Earnings

Closing Entries, step 4: Close Dividends to Retained Earnings

- DR Retained Earnings; CR Dividends

Steps in Accounting Cycle

1. Analyze business transactions.
2. Journalize the transactions.
3. Post to ledger accounts.
4. Prepare a trial balance.
5. Journalize and post adjusting entries--deferrals and accruals.
6. Prepare an adjusted trial balance.
7. Prepare financial statemen

List of temporary accounts

all revenue
all expense
Dividends
Income Summary

Accrual-basis accounting

Accounting basis in which companies record, in the periods in which the events occur, transactions that change a company's financial statements, even if cash was not exchanged.

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 all adjustments have been made.

Adjusting entries

Entries made at the end of an accounting period to ensure that the revenue recognition and matching principles are followed.

Book value

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

Cash-basis accounting

Accounting basis in which a company records revenue only when it receives cash, and an expense only when it pays cash.

Closing entries

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

Contra asset account

An account that is offset against an asset account on the balance sheet.

Depreciation

The process of allocating the cost of an asset to expense over its useful life.

Earnings management

The planned timing of revenues, expenses, gains, and losses to smooth out bumps in net income.

Fiscal year

An accounting period that is one year long.

Income Summary

A temporary account used in closing revenue and expense accounts.

Matching principle

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

Permanent accounts

Balance sheet accounts whose balances are carried forward to the next accounting period.

Post-closing trial balance

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

Prepaid expenses (Prepayments)

Assets that result from the payment of expenses that benefit more than one accounting period.

Quality of earnings

Indicates the level of full and transparent information that a company provides to users of its financial statements.

Revenue recognition principle

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

Reversing entry

An entry made at the beginning of the next accounting period; the exact opposite of the adjusting entry made in the previous period.

Temporary accounts

Revenue, expense, and dividend accounts whose balances a company transfers to Retained Earnings at the end of an accounting period.

Time period assumption

An assumption that the economic life of a business can be divided into artificial time periods.

Unearned revenues

Cash received before a company earns revenues and recorded as a liability until earned.

Useful life

The length of service of a productive asset.

Worksheet

A multiple-column form that companies may use in the adjustment process and in preparing financial statements.

Prepaid Expense Adjusting Entry

Dr. Expenses
Cr. Assets

Depreciation expense Adjusting Entry

Dr. Depreciation Expense
Cr. Accumulated Depreciation

Unearned Revenues Adjusting Entry

Dr. Liabilities
Cr. Revenues

Accrued revenues Adjusting Entry

Dr. Assets
Cr. Revenues

Accrued expenses Adjusting Entry

Dr. Expenses
Cr. Liabilities

Closing entries posting steps

1. Close the revenue accounts to the Income Summary account.
2. Close the expense accounts to the Income Summary account.
3. Close the Income Summary account to Retained Earnings.
4. Close Dividends to Retained Earnings.

Closing Entries, step 1: Close the revenue accounts to the Income Summary account.

-DR revenue; CR Income Summary

Closing Entries, step 2: Close the expense accounts to the Income Summary account.

- DR Income Summary; CR Expense accounts

Closing Entries, step 3: Close the Income Summary account to Retained Earnings.

- If Net Loss: DR Retained Earnings; CR Income Summary
- If Net Income: DR Income Summary; CR Retained Earnings

Closing Entries, step 4: Close Dividends to Retained Earnings

- DR Retained Earnings; CR Dividends

Steps in Accounting Cycle

1. Analyze business transactions.
2. Journalize the transactions.
3. Post to ledger accounts.
4. Prepare a trial balance.
5. Journalize and post adjusting entries--deferrals and accruals.
6. Prepare an adjusted trial balance.
7. Prepare financial statemen

List of temporary accounts

all revenue
all expense
Dividends
Income Summary