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Questions and Answers
What is the purpose of the general ledger in accounting?
What is the purpose of the general ledger in accounting?
In which category would 'Net Loss' typically be found in the general ledger?
In which category would 'Net Loss' typically be found in the general ledger?
What happens to dividends declared in terms of equity?
What happens to dividends declared in terms of equity?
Where do businesses record their financial transactions initially before transferring them to the general ledger?
Where do businesses record their financial transactions initially before transferring them to the general ledger?
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Which of the following is NOT a category typically found in the general ledger?
Which of the following is NOT a category typically found in the general ledger?
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What is the purpose of adjusting entries in accounting?
What is the purpose of adjusting entries in accounting?
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When are adjusting entries recorded in the accounting process?
When are adjusting entries recorded in the accounting process?
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In accounting journals, what do adjusting entries primarily help in achieving?
In accounting journals, what do adjusting entries primarily help in achieving?
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Which financial statement is impacted by adjusting entries related to deferred items like interest and benefits?
Which financial statement is impacted by adjusting entries related to deferred items like interest and benefits?
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How are financing activity accounts affected by adjusting entries for stock options granted by companies?
How are financing activity accounts affected by adjusting entries for stock options granted by companies?
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Study Notes
Accounting Journal
Accounting journals are an essential part of accounting record keeping. They serve the dual purpose of providing both financial data and documentation for external auditors and management reporting purposes. This section discusses two critical components related to accounting journals: adjusting entries and the general ledger.
Adjusting Entries
Adjusting entries refer to transactions recorded after an accounting period has ended but before the next one begins. These entries aim to reflect income revenue and expenses incurred during the previous accounting period accurately. Examples of such entries include the following:
Deferred Tax Expense and Pretax Income Statement Items
At year-end, the tax expense is recognized based on the amount of taxes owed by the company. At the same time, if there were deferred items like interest and benefit, they are adjusted to absorb them into pretax lines in the consolidated statement of activities. For example, a $100,000 item might need to be added back to pre-tax net income to determine post-tax net income:
Deferral of Interest and Benefits: Add to Pretax Lines
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Pretax income $100,000
Increase in accrued liabilities $100,000
Total $200,000
Changes in Ownership Equity
For companies with stock options outstanding, the financing activity account is increased by the cost of the shares granted instead of the exercise price paid by employees. Additionally, dividends declared, if already recorded as current assets, become equity:
Dividends Declared: Increase Owners' Equity
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Cash $50,000
Net increase in stockholders' equity $50,000
Total $100,000
General Ledger
The general ledger is the primary accounting record used by businesses and organizations to keep track of their financial transactions over a given period of time. It serves as the starting point from which all other financial statements are derived and provides information about the financial position of the organization. The general ledger typically consists of several accounts organized into various categories:
- Assets
- Liabilities
- Capital Stock
- Retained Earnings
- Revenue
- Cost of Goods Sold
- Operating Expenses
- Net Loss
Each transaction must be posted to the appropriate account within these categories. Once the journal entry is made, it can then be transferred to the general ledger account.
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Description
Learn about adjusting entries in accounting, which are transactions recorded at the end of an accounting period to accurately reflect income revenue and expenses. Explore the significance of the general ledger as the primary accounting record used by businesses to track financial transactions and derive financial statements.
