Ch.3 – Flashcards
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Cash basis method
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GAAP does not accept, easiest method; Revenues are recorded only when we receive cash, record expense when cash is paid, all about cash out , cash in, small companies use this method
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Accrual basis method
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GAAP, gives more info for financial statement users, gives more representative numbers; not about cash but about how we earn our revenue and incur our expense; earn providing service or sell products
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Incur expense, we use the Matching Principle. What is that?
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recording expenses in the same period they help generate the revenue
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adjusting entries
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what you do at the end of a period to adjust our accounts and update
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Adjusting entries: Prepaid amounts: Rent $6000 a year
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every month is $500 (6000/12); Rent Expense, Prepaid Rent 500
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Adjusting entries: Supplies 2300, Remaining 1500
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Supplies expense, supplies 800 (2300-1500)
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Adjusting entries: Unearned revenue $600 for 10 people. 1 person took training
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Unearned revenue, service Revenue $60 (600/10)
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Adjusting entries: Depreciation; Bought equipment for $24000, useful life 60 months
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Depreciation expense, accumulated depreciation $400 (24000/60)
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Depreciation
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cost allocation of long term asset
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Adjusting entries: Accrued salaries expense: Jan 28 is last pay date we have to wait 7 days to pay salaries
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Jan 29, 30, 31 = 3 days x 100 per day; Salaries expense, salaries payable $300
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Accrued expense
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an amount an expense incurred but not paid in cash
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Adjusting entries: Accrued utilities expense: $960 utility bill received
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Utilities expense $960, Utilities payable $960
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Adjusting entries: Accrued Notes Payable $10,000, 12% interest rate for 1 month
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10000 x .12 x 1/12 = 100; Interest expense, interest payable $100
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Interest Rate =
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Principle x interest rate x time
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Accrued Revenue
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earned but not received
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Adjusting entries: Accrued revenue $200 earned but not billed
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Accounts receivable , service revenue 200
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______ entries do not affect adjusted entries.
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cash
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closing entry
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close revenue, expense, and dividend to the retained earnings account; transfer revenue, expense and dividend to the retained earnings
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temporary accounts
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revenue, dividend, expense = zero when closing entries
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Accrued salaries: a business pays employees $4200 every 2 weeks ($300 per day. Last Pay day was Dec. 28. Record payment and adjusting entry on Dec. 31
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Dec. 29, 30, 31 = 3 days unpaid x $300 = 900; salaries expense, cash 4200; adj: salaries expense, salaries payable 900
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Adjusting entries: Prepaid Rent: Oct. 1 Paid one year rent 19200 (1600 per month); Record payment and adjusting entry on Dec 31)
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Prepaid rent, cash 19200; 1600 x 3 months = 4800 expired; Rent expense 4800, prepaid rent 4800
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Adjusting entries: Long term assets or Depreciation: April 1 Purchase Equipment 36000 expected to be used 6 yrs or 72 months. Record purchase and record depreciation on Dec 31; Net Equipment
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Equip., Cash 36000; 36000/27 months = $500 per month x 9 months = 4500 ; Depreciation expense, accumulated depreciation 4500; 36000-4500 (accum) = 31500
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Adjusting entries: Unearned revenue. Nov.1 Customer rent apartment and paid cash $12000 for 12 months (1000 per month) Record receipt of cash, and adjusting entry on Dec. 31. next 10 years
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Cash, unearned revenue 12,000; 1000 x 2 months = 2000 earned; Unearned revenue, rent revenue $2000; 120000-2000 = 10000
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The revenue recognition principle states that:
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Revenue should be recognized in the period earned.
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The matching principle is the principle that states:
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All costs that are used to generate revenue are recorded in the period the revenue is recognized.
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Adjusting entries are primarily needed for:
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accrual basis accounting
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Prepayment occurs when
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Cash payment (or an obligation to pay cash) occurs before the expense recognition.
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__________ ________ Always involve at least one income statement account and one balance sheet account.
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Adjusting entries
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Yummy Foods purchased a one-year hazard insurance policy on August 1 and recorded the $4,200 premium to prepaid insurance. At its December 31 year-end, Yummy Foods would record which of the following adjusting entries?
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Insurance expense, prepaid insurance 1750; 4200/12 = $500 per month x 5 months = 1750
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On September 1, 2015, Gold Magazine sold 400 one-year subscriptions for $90 each. The total amount received was credited to Unearned Revenue. What would be the required adjusting entry at December 31, 2015?
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unearned revenue, service revenue 12,000; $90/12 months = $7.50 per month. $7.50 × 4 months × 400 subscriptions = $12,000.
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During the year, Cheng Company paid salaries of $22,300. In addition, $9,200 in salaries has accrued by the end of the year but has not been paid. The year-end adjusting entry would include which one of the following?
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Credit to salaries payable for $9,200
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At the beginning of December, Global Corporation had $2,700 in supplies on hand. During the month, supplies purchased amounted to $2,400, but by the end of the month the supplies balance was only $2,400. What is the appropriate month-end adjusting entry?
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Debit supplies expense $2,700, credit supplies $2,700
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Accounts payable $14,700, Buildings 88,000, Cash 12,200, Accounts receivable 11,300 , Sales tax payable 3,400, Retained earnings 45,800 ,Supplies 41,200, Notes payable due in 18 months 32,000, Interest payable 2,400, Common stock 54,400
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Current assets = Cash, AR, Supplies
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Retained Earnings $64,900 Supplies 37,000
Equipment 72,100 Accounts Receivable 8,800 Unearned Revenue 4,500 Accounts Payable 14,600 Common Stock 23,200 Notes Payable due in 18 months 28,000 Interest Payable 5,300
Cash 22,600
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Current liabilities = unearned revenue, accounts payable, interest payable
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When a company prepares closing entries, which one of the following is NOT a correct closing entry? Debit Retained Earnings; credit Salaries Expense. Debit Dividends; credit Retained Earnings. Debit Service Revenue; credit Retained earnings.
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Debit Dividends; credit Retained Earnings.
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The closing entry for expenses includes:
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A debit to Retained Earnings and a credit to all expense accounts.
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Which of the following is a possible closing entry?
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Debit Service Revenue, credit Retained Earnings.
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The closing process includes which of the following?
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Closing the balances of revenue, expense and dividend accounts to zero.
