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What is the dual purpose of adjusting entries in accounting?
To ensure assets, liabilities, and equity are properly valued at the end of the period, and to ensure revenues and expenses are properly reported on the income statement.
What types of accounts are affected by adjusting journal entries?
At least one income statement account and at least one balance sheet account, but never cash.
What are the four types of adjusting journal entries?
Deferrals (deferred revenue and deferred expense) and Accruals (accrued revenue and accrued expense).
What is a deferred expense?
An expenditure that is paid in cash before it is incurred, and it is recognized as an expense over time.
When should expenses be recorded according to the matching principle?
Expenses should be recorded in the period in which they are used to earn revenue.
What is the adjusting entry for a deferred expense when expenses are recognized?
Expense (+E, -SE) and Prepaid Expense (-A).
How is depreciation defined in accounting?
Depreciation is the allocation of the cost of equipment over its period of use.
Why do we credit accumulated depreciation instead of the asset account?
To provide more information and to show the net value of the asset after accounting for wear and tear.
What is the initial journal entry for purchasing equipment?
Plant and Equipment (+A) and Cash (-A).
How does Kinnick Corporation's equipment purchase affect its financial statements?
It increases Plant and Equipment by the purchase amount and decreases Cash by the purchase amount.
What happens when an asset is sold and how is it recorded?
Record Cash received from sale and the accumulated depreciation on the asset to calculate the gain or loss on the sale.
What are accrued expenses?
Expenses that have been incurred but not yet paid, recorded as liabilities.
What is the adjusting entry for accrued expense?
Expense (+E, -SE) and Payable (+L).
Why is it important to prepare adjusting entries at the end of the accounting period?
To ensure all revenues and expenses are accurately represented in the financial statements for that period.
What is the impact of recording a deferred revenue?
It recognizes cash received before the service is performed or goods are delivered, affecting liabilities.
What is an example of a deferral?
Deferred revenue where cash is received for services to be provided in the future.
Which accounts are affected when adjusting for prepaid expenses?
Expense account and Prepaid Expense account.
