Questions and Answers
Why and when are adjusting entries made?
Adjusting entries are required every time a company prepares financial statements to ensure accounts are up to date for financial statement purposes.
What does the matching principle dictate?
The matching principle dictates that efforts (expenses) be matched with results (revenues).
What is the cash basis of accounting?
It is an accounting basis in which companies record revenue when they receive cash and an expense when they pay cash.
What is the accrual basis of accounting?
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What is a contra account?
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What is profit margin?
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How do you calculate the effect on net income when an adjusting entry is not made?
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What does a journal entry for depreciation show?
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How are adjusting entries for accruals made?
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How are adjusting entries for deferrals made?
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What is a posting-closing trial balance report?
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What are accrued revenues?
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What accounts are made equal to zero when closing entries are made?
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What categories does a classified balance sheet include?
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What is accumulated depreciation?
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What does the accounting cycle entail?
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What is the profit margin formula?
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What is the depreciable cost?
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What is book value?
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What is an adjusted trial balance?
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What are accrued expenses?
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How is the current ratio calculated?
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How is the dividends account closed?
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What accounts are considered temporary?
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What is a nominal account?
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What is a permanent account?
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What accounts are considered permanent?
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What are balance sheet accounts?
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What accounts are affected with each adjusting entry?
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Why are closing entries necessary?
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What assets are not depreciated?
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What is the order of preparing financial statements?
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What is depreciation?
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What is the revenue recognition principle?
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What does the cost principle dictate?
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What does the income statement report?
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What does the statement of retained earnings show?
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What does the balance sheet report?
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Study Notes
Adjusting Entries
- Required whenever financial statements are prepared.
- Ensure accounts in the trial balance are accurate for reporting.
- Each entry affects one income statement and one balance sheet account.
Matching Principle
- Aligns expenses with related revenues for accurate reporting.
Cash Basis of Accounting
- Revenue recorded upon cash receipt; expenses recorded when cash is paid.
Accrual Basis of Accounting
- Records transactions when they occur, regardless of cash timing.
Contra Account
- Offsets an asset account on the balance sheet; ex: Accumulated Depreciation.
Profit Margin
- Measures net income as a percentage of net sales, indicating profitability.
Effect of Missing Adjusting Entries
- Net income equals total revenues minus total expenses.
- Revenue exceeding expenses results in net income; the opposite results in a net loss.
Depreciation Journal Entry
- Depreciation recorded under Property, Plant, and Equipment as a credit balance.
- Balance will carry over to the next accounting period.
Adjusting Entries for Accruals
- Accrued Expenses: Expenses incurred not yet paid, creating a liability.
- Accrued Revenues: Revenues earned but not yet received, creating an asset.
Adjusting Entries for Deferrals
- Prepaid Expenses: Cash paid for expenses before they are incurred, creating an asset.
- Unearned Revenues: Cash received before services are performed, creating a liability.
Posting-Closing Trial Balance Report
- Lists permanent accounts and their balances after closing entries.
- Only includes permanent balance sheet accounts.
Accrued Revenues
- Income earned without cash receipt; reflects services performed.
Closing Entries
- Temporary accounts (revenues and expenses) are reset; permanent accounts remain.
- Permanent accounts include assets, liabilities, and owners' equity.
Classified Balance Sheet Categories
- Current Assets: Cash, receivables, prepaid expenses, inventories.
- Long-Term Investments: Non-current holdings.
- Fixed Assets: Tangible assets such as machinery and real estate, less accumulated depreciation.
- Intangible Assets: Non-physical assets.
Accumulated Depreciation
- Asset account with a credit balance, indicating total depreciation over time.
Accounting Cycle
- Sequence of steps from data collection to financial statement preparation and closing.
Depreciable Cost
- Calculated by subtracting salvage value from an asset's purchase cost.
Book Value
- Difference between an asset's cost and its accumulated depreciation.
Adjusted Trial Balance
- Reflects all adjustments made prior to preparing financial statements.
Accrued Expenses
- Expenses not yet paid or recorded, like taxes or wages.
Current Ratio Calculation
- Determined by dividing current assets by current liabilities.
Dividends Account Closure
- Closed to Retained Earnings after closing income and expense accounts.
Temporary Accounts
- Include all revenue, expense, and dividends accounts; reset at year-end.
Nominal Accounts
- Temporary accounts reporting revenues, expenses, gains, and losses; not carried forward.
Permanent Accounts
- Continuously carried over to the next period, including balance sheet accounts.
Financial Statement Preparation Order
- Income statement, statement of retained earnings, balance sheet, statement of cash flows.
Depreciation Definition
- Rational allocation of an asset's cost to expense across its useful life.
Revenue Recognition Principle
- Revenue recognized when performance obligations are met.
Cost Principle
- Assets recorded at their historical cost, regardless of market value changes.
Income Statement
- Reports revenues and expenses, showing resulting net income or loss.
Statement of Retained Earnings
- Displays retained earnings' changes during the accounting period, including dividends.
Balance Sheet Components
- Shows assets, liabilities, and shareholder equity; derived from previous financial statements.
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Description
Explore key concepts in accounting with these flashcards covering essential topics like adjusting entries and the matching principle. Perfect for students preparing for their examinations. Test your understanding and enhance your financial statement preparation skills.