Accounting

Why are adjusting entries needed?

To update revenues and expenses that were not captured during regular journal entries and to update the related assets and liabilities.

When are adjusting entries made?

At the end of each accounting period.

What is the main purpose of adjusting entries?

To make sure revenues are recorded when earned and expenses are recorded when incurred.

What accounts does an adjusting entry affect?

At least one income statement account and at least one balance sheet account.

Does an adjusting entry involve Cash?

No. Adjusting entries NEVER involve Cash.

What are the four types of adjusting entries?

Prepaid/deferred expenses, unearned/deferred revenues, accrued revenues, and accrued expenses.

What is a prepaid expense?

Cash was paid before the expense was incurred. It begins as an asset and becomes an expense as it is used.

What are examples of prepaid expenses?

Supplies, prepaid insurance, and prepaid rent.

What is the adjusting entry for a prepaid expense?

Debit Expense; Credit Asset.

What happens to accounts when a prepaid expense is adjusted?

Expense increases and the related asset decreases.

How do you calculate supplies used?

Unadjusted Supplies balance minus Supplies Remaining = Supplies Used.

If Supplies has a $5,000 balance and $1,500 remains, how much is Supplies Expense?

$3,500 because $5,000 - $1,500 = $3,500.

What is unearned revenue?

Cash received before the company has earned the revenue.

What type of account is Unearned Revenue?

A liability because the company still owes the customer goods or services.

What is the adjusting entry for unearned revenue that has now been earned?

Debit Unearned Revenue; Credit Revenue.

What happens when unearned revenue becomes earned?

Liabilities decrease and revenue increases.

What is accrued revenue?

Revenue that has been earned but has not yet been received in cash or recorded.

What is the memory trick for accrued revenue?

"They owe us."

What is the adjusting entry for accrued revenue?

Debit Accounts Receivable; Credit Revenue.

What happens to accounts when accrued revenue is recorded?

Assets increase and revenue increases.

What is an accrued expense?

An expense that has been incurred but has not yet been paid or recorded.

What is the memory trick for accrued expenses?

"We owe them."

What are examples of accrued expenses?

Salaries payable, interest payable, utilities payable, and taxes payable.

What is the adjusting entry for an accrued expense?

Debit Expense; Credit a Payable/Liability.

What happens to accounts when an accrued expense is recorded?

Expenses increase and liabilities increase.

What is the prepaid expense adjustment pattern?

Debit Expense; Credit Asset.

What is the unearned revenue adjustment pattern?

Debit Liability; Credit Revenue.

What is the accrued revenue adjustment pattern?

Debit Asset; Credit Revenue.

What is the accrued expense adjustment pattern?

Debit Expense; Credit Liability.

What is the difference between a deferral and an accrual?

A deferral has the cash exchange before revenue/expense recognition; an accrual has revenue/expense recognition before the cash exchange.

What are the two types of deferrals?

Prepaid expenses and unearned revenues.

What are the two types of accruals?

Accrued revenues and accrued expenses.

If a prepaid expense adjustment is omitted, what happens?

Assets are overstated, expenses are understated, and net income is overstated.

If an unearned revenue adjustment is omitted, what happens?

Liabilities are overstated, revenue is understated, and net income is understated.

If an accrued revenue adjustment is omitted, what happens?

Assets are understated, revenue is understated, and net income is understated.

If an accrued expense adjustment is omitted, what happens?

Liabilities are understated, expenses are understated, and net income is overstated.

What is the basic interest formula?

Principal x Annual Interest Rate x Time = Interest.

How do you express 3 months when calculating annual interest?

3/12 of a year.

How do you adjust for interest that has been incurred but not paid?

Debit Interest Expense; Credit Interest Payable.

What is the process for preparing an adjusted trial balance?

Start with the unadjusted trial balance, determine adjustments, record adjusting entries, update account balances, and prepare the adjusted trial balance.

What must be true after preparing an adjusted trial balance?

Total debits must equal total credits.

When is the adjusted trial balance prepared?

After adjusting journal entries have been recorded.

What are the major asset classifications on a classified balance sheet?

Current Assets, Long-Term Investments, Property Plant and Equipment, and Intangible Assets.

What are examples of current assets?

Cash, short-term investments, accounts receivable, inventory, supplies, and prepaid expenses.

What are examples of Property, Plant, and Equipment?

Land, buildings, and equipment.

What does Accumulated Depreciation do on the balance sheet?

It reduces the carrying amount of the related asset.

What are examples of intangible assets?

Patents, trademarks, and goodwill.

What are examples of current liabilities?

Accounts payable, salaries payable, interest payable, unearned revenue, and the current portion of debt.

What are examples of long-term liabilities?

Long-term notes payable, mortgages payable, and bonds payable.

What are examples of Stockholders' Equity accounts?

Common Stock, Retained Earnings, and Treasury Stock.

What is the Profit Margin formula?

Net Income / Net Sales.

What does Profit Margin measure?

How much net income the company earns relative to net sales.

What is the Current Ratio formula?

Current Assets / Current Liabilities.

What does the Current Ratio measure?

The company's ability to pay short-term obligations.

What is a merchandising company?

A company that buys and sells goods.

What is Cost of Goods Sold?

The cost of the merchandise that was sold during the period.

How does a buyer record an inventory purchase on account?

Debit Inventory; Credit Accounts Payable.

How does a buyer record a purchase return?

Debit Accounts Payable; Credit Inventory.

Why is Accounts Payable debited for a purchase return?

The buyer owes the seller less money after returning merchandise.

What does 2/10, n/30 mean?

A 2% discount is available if payment is made within 10 days; otherwise the full amount is due within 30 days.

How does a buyer record a purchase discount under a perpetual inventory system?

Debit Accounts Payable; Credit Inventory for the discount; Credit Cash for the amount paid.

How much is a 2% discount on a $10,000 payable?

$200.

If a $10,000 payable qualifies for a 2% discount, how much cash is paid?

$9,800.

What account does a purchase discount reduce for the buyer?

Inventory.

How many journal entries are normally required when a seller sells merchandise?

Two.

What is the first journal entry for a merchandise sale?

Debit Cash or Accounts Receivable; Credit Sales Revenue for the selling price.

What is the second journal entry for a merchandise sale?

Debit Cost of Goods Sold; Credit Inventory for the cost of the merchandise.

Which amount is used to record Sales Revenue?

The selling price.

Which amount is used to record Cost of Goods Sold?

The cost of the inventory.

How does a seller record a sales return?

Debit Sales Returns and Allowances; Credit Cash or Accounts Receivable.

How is returned merchandise put back into inventory?

Debit Inventory; Credit Cost of Goods Sold.

What type of account is Sales Returns and Allowances?

A contra-revenue account with a normal debit balance.

How does a seller record a sales discount?

Debit Cash; Debit Sales Discounts; Credit Accounts Receivable.

What type of account is Sales Discounts?

A contra-revenue account with a normal debit balance.

What happens to Sales Revenue when Sales Returns and Sales Discounts increase?

Net Sales decreases.

When does ownership transfer under FOB Shipping Point?

When the goods leave the seller and are accepted by the carrier.

Who owns goods in transit under FOB Shipping Point?

The buyer.

Who normally pays freight under FOB Shipping Point?

The buyer.

How does a buyer record freight under FOB Shipping Point?

Debit Inventory; Credit Cash.

Why does the buyer add FOB Shipping Point freight to Inventory?

It is part of the cost of acquiring the inventory.

What is the memory trick for FOB Shipping Point?

Shipping Point = buyer owns it while it is shipping.

When does ownership transfer under FOB Destination?

When the goods reach the buyer.

Who owns goods in transit under FOB Destination?

The seller.

Who normally pays freight under FOB Destination?

The seller.

How does the seller generally classify freight under FOB Destination?

As a selling/operating expense such as delivery expense or freight-out.

What is the memory trick for FOB Destination?

Destination = seller owns it until it reaches the destination.

Under FOB Shipping Point, who includes goods in inventory while they are in transit?

The buyer.

Under FOB Destination, who includes goods in inventory while they are in transit?

The seller.

What is the first section of a multiple-step income statement?

Sales Revenue minus Sales Returns and Allowances minus Sales Discounts equals Net Sales.

What is the Net Sales formula?

Sales Revenue - Sales Returns and Allowances - Sales Discounts = Net Sales.

What is the Gross Profit formula?

Net Sales - Cost of Goods Sold = Gross Profit.

What is the Income from Operations formula?

Gross Profit - Operating Expenses = Income from Operations.

What comes after Income from Operations on a multiple-step income statement?

Other Revenues and Gains and Other Expenses and Losses.

What is the general multiple-step income statement order?

Net Sales, Gross Profit, Income from Operations, Income Before Income Taxes, Net Income.

Are Sales Returns and Allowances an operating expense?

No. They are contra-revenue and reduce Sales Revenue when calculating Net Sales.

Are Sales Discounts an operating expense?

No. They are contra-revenue and reduce Sales Revenue when calculating Net Sales.

Is Cost of Goods Sold an operating expense?

No. COGS is subtracted from Net Sales to calculate Gross Profit.

What are selling expenses?

Operating expenses directly related to selling merchandise.

What are examples of selling expenses from the Fit for Life problem?

Sales staff wages, rent expense for selling space, TV advertising expense, and sales commission expense.

What are general and administrative expenses?

Operating expenses associated with the general management and administration of the business.