Week 4: Financial Accounting Pt 2

What happens on the accrual basis?

Revenues are recognized when earned and expenses are recognized when incurred.

What happens on the cash basis?

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

Which basis is GAAP and which is Non-GAAP?

Accrual Basis - GAAP

Cash Basis - Non-GAAP

Why is an adjusting entry recorded?

to bring an asset or liability account balance to its proper amount

What is the purpose of adjusting entries? (2)

1. Bring balance sheet accounts current.

2. Reflect proper amounts of revenues and expenses on the income statement.

Adjusting entries always incorporate _____________-.

a balance sheet account and an income statement account

Adjusting entries never involve ___________.

a cash account

What are the four classifications of adjusting entries?

1. prepaid expenses

2. unearned revenues

3. accrued revenues

4. accrued expenses

What are prepaid expenses - current assets?

Expenses that have been recorded but not yet incurred

What are examples of prepaid expenses? (3)

1. rent

2. electricity

3. insurance

What are unearned revenues?

Revenues that have been recorded but not yet earned.

What are accrued (unrecorded) revenues?

Revenues that have been earned but not yet recorded. Current Asset in Balance sheet.

What are accrued (unrecorded) expenses?

Expenses that have been incurred but not yet paid. Current Liabilities

What is depreciation?

The spread of the cost of a fixed asset over the economic useful life or the fall in the value of the fixed asset.

What doesn’t depreciate?

land

Where does depreciation occur?

in the income statement

In determininhg depreciation, we must know… (3)

1. The capitalized cost of the fixed asset

2. The assets economic useful life

3. The residual value of the fixed asset, i/e. book value at the end of economic useful life

What is the most common method of depreciation?

Straight-line method

What is the straight-line method of depreciation?

assumes fixed assets is depreciated by the same amount eveyr year

What is the formula for annual depreciation?

Annual Depreciation = Depreciable Value / Economic useful life (years)

What is the formula for depreciable value?

Depreciable value = (Capitalized cost of Fixed Asset – Residual value)

How will accumulated depreciation be reflected in the balance sheet?

as a deduction from the cost of the fixed asset

What is Net Book Value (NBV) / Carrying Value (CV)?

the difference between cost of asset and accumulated depreciation

Is owner’s equity classified?

No