Mastering Adjusting Entries

Certified Bookkeeper applicants will want to use the cards as a study guide for certification. Why we use accruals, deferral and other adjustments Accrued revenue Accrued expenses (accrued liabilities/expenses) Revenue collected in advance (unearned revenue/income) Prepaid (deferred) expenses Other end-of-period entries From unadjusted trial balance to financial statements Applying your knowledge to the trial balance
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Terms in this set (...)

Cash Basis Accounting
During any given fiscal year:

Payments received = Income/Revenue
Payments made = Expenses/Disbursement

Revenue > Expenses = Net Income
Revenue < Expenses = Net Loss
What types of businesses typically use cash basis accounting?
Professional service businesses, i.e., doctors, lawyers, accountants, and engineers.
Accrual Basis Accounting
During any given fiscal year, revenue is not recognized until it has been earned and expenses until they have been incurred, regardless of whether income has been received or an expense has been paid.
What does GAAP stand for?
Generally accepted accounting principles
Revenue > Expenses
Net Income
Revenue < Expenses
Net Loss
Method of accounting required by GAAP
Accrual Basis
Under accrual basis accounting, revenues presented on the income statement are...
revenues EARNED during the year.
To accrue revenue at year end is to record...
an amount earned for which payment has not been received.
To defer revenue is to...
postpone recording a customer's payment as revenue until it is earned. (Any advance payment not yet earned is kept in a separate account until it is earned).
To accrue an expense is to record...
an expense incurred, but not yet paid for.
To recognize revenue or an expense is to...
record the amount in the General Ledger Revenue or Expense account.
Accrued revenue
Uncollected revenue (revenue earned but not yet received).
The general journal entry to record accrued revenue is:
Debit Revenue/Income Receivable (Balance Sheet Asset Acct)
Credit Revenue/Income (Income Statement Revenue Acct)

Memo: To accrue revenue/income earned

For example, for space leased for which rent has not yet been received:
Debit Rent Receivable (Balance Sheet)
Credit Rent Revenue (Income Statement)

Memo: To accrue (state period of time) rent revenue/income
Failure to accrue revenue/income impacts the financial statement, how?
1) Assets will be understated on the balance sheet;
2) Revenue/Income will be understated on the income statement; and, as a result,
3) Net Revenue/Income will be understated on the income statement
Short Term Notes
Principle + Accrued Interest is paid on due date.
Long Term Notes
Interest is paid periodically and principle (and balance of interest) is paid on due date. If the fiscal year ends before the interest is received, interest is accrued to the last day of that period.
Interest Computation (Payable or Receivable)
Principle x Annual Interest Rate x Fraction of Year = Accrued Interest
Accounts Receivable to Notes Receivable Conversation
If a company converts an overdue A/R acct to a loan, payment of interest/principle is not due until loan due date and two general journal entries are required:

First, Debit Note Receivable
Credit Accounts Receivable

Memo: To record conversion of A/R to N/R

Then, Debit Interest Receivable
Credit Interest Revenue

Memo: To accrue interest revenue
Accrued revenue is revenue...
earned, but not yet received.
The adjusting entry to accrue revenue...
debits a receivable account (Balance Sheet Asset Acct) and credits a revenue account (Income Statement Revenue Acct).
Crediting a revenue account...
increases revenue and net income on the Income Statement.
Debiting a revenue account...
decreases revenue and net income on the Income Statement.
Debiting a receivable account...
increases assets on the Balance Sheet.
Crediting a receivable account...
decreases assets on the Balance Sheet.
If you omit the adjusting journal entry to accrue revenue, net income will be...
understated.
Interest Receivable is what type of account?
Asset
The Balance Sheet is made up of what accounts?
Assets, Liabilities, and Equity
The Income Statement is made up of what accounts?
Revenue/Income and Expenses
The Chart of Accounts is arranged or grouped by...
the Balance Sheet accounts followed by the Income Statement accounts.
If an adjusting journal entry for accrue rental revenue is omitted, liabilities are effected how?
No effect because revenue does not affect liabilities (money owed by company).
When revenue is accrued...
payment is received after the revenue is recognized.
Receivables is what type of account?
Asset
What is a liability?
Money that is owed.
Interest Receivable appears on which financial statement?
The Balance Sheet
Under accrual basis accounting, expenses presented on the income statement are...
expenses incurred during the year (regardless of whether they have been paid for).
What are financial statements?
A formal record of the financial activities of an entity.
What are the four main types of financial statements?
Balance Sheet
Income Statement aka Profit & Loss Statement
Cash Flow Statement
Statement of Retained Earnings
What is the purpose of the Balance Sheet?
To report the financial position of an entity at any point in time.
Balance Sheet
Assets = Liabilities + Equity
Accrued expenses are expenses that...
have been incurred, but not yet paid for.
When is an accrued expense paid for?
After the expense has been recorded on the books.
Adjusting journal entries for accrued expenses debit what account?
Expense
Increasing expenses on the income statement...
reduces net income, and credits a payable account, which increases liabilities on the balance sheet.
The general journal entry to record an accrued expense is:
Debit Expense (Income Statement Expense Acct)
Credit Payable (Balance Sheet Liability Acct)

Memo: To accrue expense
Failure to accrue expenses impacts the financial statement, how?
1) Liabilities will be understated on the Balance Sheet;
2) Expenses will be understated on the Income Statement; and, as a result,
3) Net income will be overstated on the Income Statement.
When a company gives a note to borrow money, the entries would be as follows:
First, Debit Cash
Credit Note Payable (N/P)

Memo: To record N/P

Then, Debit Interest Expense
Credit Interest Payable

Memo: To accrue interest expense
What kind of account is Taxes Payable?
Liability
If a company forgets to accrue utilities expense at year end, how does it affect net income?
Net income will be overstated.
If a company fails to record an adjusting journal entry for property taxes, then net income will be... Why?
overstated. Because not all expenses are on the books, net income will be overstated.
An accrued expense is one that has been...
incurred, but not yet paid.
An expense is accrued by debiting and crediting what accounts?
Expense, Payables
Does an adjusting journal entry to accrue expense increase or decrease net income?
decrease
An expense recorded as incurred, but not paid, is presented as what on the Balance Sheet?
Liability
A chart of accounts lists accounts in what order?
Assets
Liabilities
Owners' Equity
Income
Expenses
Liabilities are often referred to as...
Payables
Unearned Revenues/Income is what type of account?
Liability
Accounting entries involve a minimum of how many accounts?
Two - Debit and Credit
Assets - Liabilities =
Owners' Equity
The listing of all of the accounts available for use in a company's accounting system is known as the...
Chart of Accounts.
The financial statement that reports the revenues and expenses for a period of time such as a year or a month is the...
Income Statement.
The financial statement that reports the assets, liabilities, and stockholders' (owner's) equity at a specific date is the...
Balance Sheet.
Resources owned by a company (such as cash, accounts receivable, vehicles) are reported on the balance sheet and are referred to as...
assets.
Land and inventory cannot be depreciated.
True
Unearned revenue (deferred revenue)
Payment for services not yet performed
Cash collected in advance for work to be performed, services to be rendered, or goods to be delivered is a(n)...
Liability
In accrual basis accounting, payment received in advance is not...
Revenue
Unearned revenue is also referred to as...
Deferred revenue
Under accrual basis accounting, revenues in the general ledger have been...
earned, whether paid or not