Chapter 4: Adjustments, Financial Statements, and Financial Results

Accounting systems

Accounting systems

__________ record daily transactions.

adjusting journal entries

For _________, cash is NEVER involved.

accounting period

Adjustments are made at the end of the __________.

one

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

Assets, Liabilities, Revenues, Expenses

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

two

There are _____ categories for adjustments.

first

Deferral adjustments arise because a cash transaction happened _____.

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

Deferral adjustments:

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).

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.

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.

after

Accrual adjustments arise because a cash transaction happened _____.

Cash

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

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).

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).

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

For deferral accounts,

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

For accrual adjustments,

Depreciation

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

expense recognition principle

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

Depreciation expense

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

Accumulated depreciation

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

Debit Depreciation Expense Credit Accumulated Depreciation

The journal entry for depreciation:

contra account

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

be attached to another account, it can never be alone

A contra account must

the opposite of the account its stuck to

A contra account's normal balance is

Amortization

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

income statement

The Amortization Expense account is found on the __________.

Accumulated amortization

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

Adjustments

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

adjusted trial balance

The __________ ensures that debits still equal credits.

Adjusted t-account balances

__________ are transferred into debit and credit columns.

Current

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

closing process

The __________ is done at the end of the year.

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.

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.

Retained Earnings

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

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

Journal entry #1 for closing accounts

Debit Retained Earnings Credit Dividends Declared

Journal entry #2 for closing accounts

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.

temporary

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

inaccurate portrayal.

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