Chapter 4: Adjustments, Financial Statements, and Financial Results

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Accounting systems

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41 Terms

1

Accounting systems

__________ record daily transactions.

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adjusting journal entries

For _________, cash is NEVER involved.

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accounting period

Adjustments are made at the end of the __________.

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4

one

Adjusting entries always have _____ balance sheet account and _____ income statement account.

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5

Assets, Liabilities, Revenues, Expenses

The purpose of adjustments at the end of the period is to state the following at appropriate amounts:

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two

There are _____ categories for adjustments.

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first

Deferral adjustments arise because a cash transaction happened _____.

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8

decrease balance sheet accounts and increase the corresponding income statement accounts.

Deferral adjustments:

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9

Deferral adjustment regarding expenses

One asset and one expense account: An asset from the balance sheet moves to the income statement as an expense (prepaid rent turns into rent expense).

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10

Deferral adjustment regarding revenues

One liability and one revenue account: A liability called deferred revenue is reported on the balance sheet. Once liability service or sale is provided, it moves onto the income statement as "sales" or "service" revenue.

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Accrual adjustments

________ are needed when a company has earned revenue or incurred an expense in the current period but has not recorded it because cash will be paid later.

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after

Accrual adjustments arise because a cash transaction happened _____.

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Cash

_____ is NEVER involved in an accrual adjustment because cash is paid after.

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Accrual adjustment regarding expenses

One liability and one expense account: A liability called a payable (to pay later) is reported on the balance sheet. Once paid, it moves to the income statement as an expense. (interest payable turns into interest expense).

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Accrual adjustment regarding revenues

One asset and one revenue account: An asset is reported on the balance sheet as a receivable (to collect later). Once collected, it is moved to the income statement as a revenue. (rent receivable turns into rent revenue).

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assets are paired with expenses and liabilities are paired with revenues.

For deferral accounts,

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17

assets are paired with revenues and liabilities are paired with expenses.

For accrual adjustments,

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18

Depreciation

________ is the process of allocating the cost of buildings, vehicles, and equipment (tangible assets) to the accounting periods in which they are used.

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expense recognition principle

The ________ says that when equipment is used to generate revenue, part of the cost is becomes an expense.

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20

Depreciation expense

__________ is found on the income statement and records the cost of equipment at the time.

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Accumulated depreciation

__________ is found on the balance sheet and it is a contra account used to reduce value of equipment.

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Debit Depreciation Expense Credit Accumulated Depreciation

The journal entry for depreciation:

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23

contra account

A _________ is an account that is a reduction of another account.

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24

be attached to another account, it can never be alone

A contra account must

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the opposite of the account its stuck to

A contra account's normal balance is

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Amortization

________ is the corollary to depreciation and relates to intangible assets (advertisements, patents, logos).

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income statement

The Amortization Expense account is found on the __________.

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Accumulated amortization

__________ is on the balance sheet, brings the value down for assets, and has a normal credit balance.

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Adjustments

________ are made at the end of the accounting period. They show that revenues (earned) and expenses (incurred) are reported properly.

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adjusted trial balance

The __________ ensures that debits still equal credits.

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Adjusted t-account balances

__________ are transferred into debit and credit columns.

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Current

_______ liabilities and _______ assets should be labeled on the balance sheet.

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closing process

The __________ is done at the end of the year.

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Temporary accounts

__________ are tracked for a limited period of time and are closed at the end of the year. This includes revenues, expenses, and dividends.

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Permanent accounts

_________ are not closed at the end of the year and are carried into the next year. This includes assets, liabilities, and stockholders' equity.

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Retained Earnings

__________ for the end of the year becomes the beginning balance for next year.

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Debit revenue accounts Credit expense accounts Debit or credit the difference to Retained Earnings

Journal entry #1 for closing accounts

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38

Debit Retained Earnings Credit Dividends Declared

Journal entry #2 for closing accounts

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39

Post closing entries

________ are the last step in the accounting process and will ensure all income statement accounts and the dividend account have a zero balance.

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temporary

Only __________ accounts are found on the post closing trial balance.

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41

inaccurate portrayal.

If there were no adjustments, the company's performance would have an ________.

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