5. Adjusting Entries, Closing Accounts, & the Income Statement

Adjusting Entries

Internal transactions that update account balances before the conclusion of the accounting cycle.

Deferred Revenues

Liabilities fulfilled by the delivery of goods or services that should now be recognized as revenue.

Adjusting Entries

Internal transactions that update account balances before the conclusion of the accounting cycle.

Deferred Revenues

Liabilities fulfilled by the delivery of goods or services that should now be recognized as revenue.

Accrued Expenses

Expenses that have been incurred during the period but not yet recorded.

Depreciation

The loss in value of tangible assets over time due to wear and tear.

Amortization

The process of spreading out a lump sum payment into a stream of payments for intangible assets.

Unadjusted Trial Balance

A worksheet that sums account balances to verify that debits equal credits before adjustments.

Accrued Revenue

Revenues that have been recognized but not yet recorded as cash received.

Trial Balance

A summary of balances in each account before or after adjusting entries.

Permanent Accounts

Accounts that accumulate transaction effects over the life of a business, such as assets and liabilities.

Temporary Accounts

Accounts that accumulate effects of transactions for a specific period of time, such as revenue and expenses.

Salvage Value

The estimated rescue value of an asset at the end of its useful life.

Net Book Value

The value of an asset after accumulated depreciation has been subtracted.

Straight Line Depreciation

A method of allocating the cost of an asset evenly across its useful life.

Closing Entries

Internal transactions that zero out temporary accounts at the end of the accounting period.

Income Statement

A financial statement showing revenues, expenses, and net income for a period.

Balance Sheet

A financial statement listing assets, liabilities, and stockholders’ equity at a specific point in time.

__________ are internal transactions that update account balances before the conclusion of the accounting cycle.

Adjusting Entries

__________ refers to the loss in value of tangible assets over time due to wear and tear.

Depreciation

The __________ is a financial statement that shows revenues, expenses, and net income for a period.

Income Statement

__________ are accounts that accumulate the effects of transactions for a specific period of time.

Temporary Accounts

The process of spreading out a lump sum payment into a stream of payments for intangible assets is known as __________.

Amortization

A __________ provides a summary of balances in each account before adjusting entries.

Trial Balance

__________ are liabilities fulfilled by the delivery of goods or services that should be recognized as revenue.

Deferred Revenues

The __________ of an asset represents its value after accumulated depreciation has been subtracted.

Net Book Value

__________ are transactions that zero out temporary accounts at the end of the accounting period.

Closing Entries

The __________ estimates the rescue value of an asset at the end of its useful life.

Salvage Value

What is the purpose of adjusting entries in accounting?

To update account balances before the closing of the accounting cycle.

What is a deferred revenue?

A liability representing payments received for goods or services to be delivered in the future.

How are accrued expenses defined?

Expenses that are incurred but not yet recorded.

What does depreciation expense relate to?

The allocation of the cost of tangible assets over their useful life.

Explain amortization in accounting.

The process of gradually writing off the initial cost of an intangible asset.

What is an unadjusted trial balance?

A statement that lists account balances before any adjustments are made.

What signifies accrued revenue?

Revenue that has been recognized but not yet collected in cash.

What do permanent accounts represent?

Accounts that carry forward balance from one accounting period to the next.

What characterizes temporary accounts?

Accounts that are closed at the end of each accounting period, such as revenues and expenses.

Define salvage value.

The estimated market value of an asset at the end of its useful life.

What is the formula for calculating salvage value?

Salvage Value = Initial Cost - (Depreciation per Year × Useful Life)

How does straight-line depreciation affect salvage value?

Salvage value is subtracted from the total depreciable amount when using straight-line depreciation.

In the context of salvage value, what does 'useful life' refer to?

The estimated duration an asset is expected to be used before being disposed of.

What is the significance of estimating salvage value?

It helps determine the total depreciation expense and the net book value of an asset.

How is salvage value treated in financial statements?

It is used to calculate the depreciation expense and appears in the asset valuation.

Is salvage value the same as market value?

No, salvage value is an estimate of value at the end of an asset’s useful life, while market value can vary based on demand.

What is a common method for estimating salvage value?

Using historical data from similar assets or industry standards.

Does salvage value affect tax calculations?

Yes, salvage value influences calculations of depreciation and potential taxable gain on asset sale.

What happens if salvage value is overestimated?

It may lead to lower reported depreciation expenses and higher taxable income.

Can salvage value be adjusted?

Yes, salvage value can be re-evaluated if the asset’s usage or market conditions change.

What is the formula for straight-line depreciation?

Straight-Line Depreciation = (Cost of Asset - Salvage Value) / Useful Life.

What does the term 'useful life' refer to in depreciation?

Useful life is the period over which an asset is expected to be used by a business.

How do you calculate annual depreciation using the double declining balance method?

Annual Depreciation = 2 × (1 / Useful Life) × Book Value at Beginning of Year.

What components are needed to calculate the decline in asset value?

You need the initial cost, salvage value, and useful life of the asset.

What is salvage value?

Salvage value is the estimated worth of an asset at the end of its useful life.

How does accelerated depreciation differ from straight-line depreciation?

Accelerated depreciation methods allocate more expense in the earlier years of an asset’s life.

What is the Modified Accelerated Cost Recovery System (MACRS)?

MACRS is a method of accelerated depreciation used for tax purposes in the U.S.

When calculating depreciation, what is the significance of the comparison between book value and salvage value?

Depreciation should not reduce the book value below the salvage value.

What is a depreciation schedule?

A depreciation schedule tracks the depreciation of an asset over its useful life.

Why is it important to estimate salvage value accurately?

Accurate salvage value estimation affects the calculation of depreciation expenses and financial reporting.