ACCOUNTING EXAM 2

accrual basis accounting

revenue is recorded when earned, regardless of when cash is received

expense recorded when incurred, regardless of when cash is paid

cash basis accounting

revenue is recorded when cash received

expense recorded when cash is paid

adjusting entries

journal entries recorded to update general ledger accounts at the end of a fiscal period

deferral

cash changes hands before expense incurred or revenue is earned

prepaid expense

company pays for expense before used/incurred

unearned revenue

cash is collected before revenue is earned

accruals

expense is incurred or revenue is earned before cash changes hands

accrued expenses

expense is used/incurred before paid

accrued revenues

revenue earned before cash is received

prepaid payment

expenses paid in cash before they are used

adjusting entries for prepaid expenses

DR Expense (-NI, -RE, -Equity)
CR Asset

unearned revenue

cash received before revenue earned

adjusting entry at end of period for accrued expense

DR Expense
CR Asset

unearned revenue

cash received before revenue is earned

adjusting entry for unearned revenue

DR Unearned Revenue
CR revenue

accrued expenses

expenses incurred but not yet paid or recorded

adjusting entry for accrued expenses

DR expense, CR accounts payable

entry when accrued expense eventually paid

DR payable, CR cash

accrued revenue

revenues for services performed but not yet recorded

adjusting entry for accrued revenue

DR receivable (asset), CR Revenue

entry when accrued revenue cash eventually collected

DR cash, CR receivable

adjusting entry at end of period for accrued revenue

DR receivable
CR revenue

accounting cycle

1. analyze each transaction

2. record journal entry

3. post journal entry to t-account

4. prepare unadjusted trial balance

5. record and post adjusting entries

6. prepare adjusted trial balance

7. prepare financial statements

8. closing process

9. prepare post-closing trial balance

purposes of closing process

set balances for revenues, expenses, and dividend accounts to 0

transfer net income and dividends to retained earnings account

closing revenue accounts

DR revenue, CR income summary

closing expense accounts

DR income summary, CR expense accounts

close income summary to retained earnings

DR income Summary, CR retained earnings

close dividends to retained earnings

DR retained earnings, CR dividends

temporary accounts

relate to particular period

examples of temporary accounts

revenues, expenses, and dividends (income statement and dividends)

permanent/real accounts

balances carried from period to period

examples of permanent accounts

assets, liabilities, C/S, retained earnings (balance sheet account)

classified balance sheet

groups together similar assets and similar liabilities using a number of standard classifications and sections

asset classifications

• current assets

• long-term investments -plant assets -intangible assets

liabilities and equity classifications

-current liabilities
-long-term liabilities
-stockholders equity

current assets

assets that companies expect to convert to cash or use within one year

long-term investments

generally investments in stocks and bonds of other corporations that companies hold for more than 1 year

plant assets

assets with relatively long, useful lives that are currently used in operating the business (land, equipment, machinery)

intangible assets

assets that do not have physical substance (copyright, trademark)

current liabilities

liabilities due within a short time, usually within a year

long-term liabilities

liabilities owed for more than a year

stockholders' equity

consists of common stock and retained earnings

control features of a bank account

use of a bank contributes significantly to good internal control over cash

what are the benefits of control features?

• allows companies to use electronic funds (no cash handled)

• sends company a monthly bank statement

• provides information for the company to "reconcile" the bank account

bank reconciliation

A report that accounts for the differences between the bank statement and a checkbook balance

adjustments for bank statement

+ deposits in cash
- outstanding checks
(+/-) errors made by bank

adjustments for company's books

(+) bank collections
(+) interest revenue
(-) service charges/check print
(-) NSF checks
(-) other returned checks
(+/-) EFTs
(+/-) errors made by business

JE for bank collection

DR cash, CR accounts receivable

JE for bank charges

DR Miscellaneous expense, CR cash

JE for NSF (not sufficient funds) check

DR accounts receivable, CR cash