Adjusting Accounts for Financial Statements

Flashcards about adjusting accounts for financial statements.

Accrual Basis

Revenues are recorded when products or services are delivered, and records expenses when incurred.

Cash Basis

Revenues are recorded when cash is received, and expenses are recorded when cash is paid.

Revenue Recognition Principle

Revenue be recorded when the goods or services are provided to customers and at an amount expected to be received from customers.

Expense Recognition (or matching) Principle

Expenses be recorded in the same accounting period as the revenues that are recognized as a result of those expenses.

Prepaid Expenses

Assets paid for in advance of receiving their benefits. Examples: Prepaid Insurance, Prepaid Rent, Supplies

Depreciation

Instead of expensing the cost of a plant asset (equipment, building, cars, etc.) in the year it is purchased we allocate, or spread out, the cost over their expected useful lives.

Straight-Line Depreciation

Asset Cost - Salvage Value / Useful Life

Unearned revenue

Cash received in advance of providing products or services.

Accrued Expense

Costs incurred in a period that are both unpaid and unrecorded.

Accrued revenues

Revenues earned in a period that are both unrecorded and not yet received in cash or other assets.

Temporary Accounts

Resets revenue, expense, and dividends account balances to zero at the end of the period.

Permanent Accounts

Updates Retained Earnings account to match that reported in the balance sheet and statement of retained earnings.

Current Assets

Expected to be sold, collected, or used within one year or the company’s operating cycle, whichever is longer. Examples: cash, short-term investments, accounts receivable, short-term notes receivable, merchandise inventory, and prepaid expenses.

Long-Term Investments

Expected to be held for more than one year or the operating cycle. Examples: notes receivable and investments in stocks and bonds expected to be held for more than the longer of one year or the operating cycle.

Plant Assets

Tangible long-lived assets used to produce or sell products and services. Examples: equipment, machinery, buildings, and land that are used to sell products and services. Also called property, plant, and equipment (PP&E) or fixed assets.

Intangible Assets

Long-term assets that benefit business operations but lack physical form. Examples: patents, trademarks, copyrights, franchises, and goodwill.

Current liabilities

Liabilities due within the longer of one year or the company’s operating cycle. Examples: accounts payable, wages payable, taxes payable, interest payable, and unearned revenues.

Long-term liabilities

Liabilities not due within the longer of one year or the company’s operating cycle. Examples: notes payable, mortgages payable, bonds payable, and lease obligations.

Equity

The owner’s claim on the assets. For a corporation, reported in retained earnings and common stock accounts. Equity is not separated into current and noncurrent categories.

Profit Margin

The profit margin ratio measures the company’s net income to net sales.

Current ratio

Helps assess the company’s ability to pay its debts in the near future: Current assets / Current liabilities

Reversing entries

Optional. They reverse the debits and credits of adjusting entries involving accrued revenues and accrued expenses. The purpose is to simplify recordkeeping.