Rocco Mastering Adjustment Entries AIPB
Accruals and Deferrals Calculate & record adjusting entries for accrued / deferred expenses d and revenue Construct Unadjusted trial balance, add adjustments & complete adjusted trial balance
Terms in this set (57)
Recording of previously unrecorded revenues, using a receivable account, or, recording expenses using a payable account
A financial statement that presents the revenues and expenses and resulting net income or net loss of a company for a specific period of time.
previously acquired assets that need to be adjusted at the end of the accounting period to reflect the amount of expense incurred in using the asset to generate revenue
Revenues earned in a period that are both unrecorded and not yet received in cash (or other assets); adjusting entries for recording accrued revenues involve increasing assets and increasing revenues.
Revenue and expenses are recognized at the actual time the business receives the cash or pays a bill.
An accounting method that measures the performance and position of a company by recognizing economic events regardless of when cash transactions occur. The general idea is that economic events are recognized by matching revenues to expenses (the matching principle) at the time in which the transaction occurs rather than when payment is made (or received). This method allows the current cash inflows/outflows to be combined with future expected cash inflows/outflows to give a more accurate picture of a company's current financial condition.
represents amounts of future cash payments to employees for work that has already been performed
The adjusting entry to record salaries owed to employees but not paid until the next accounting period. It involves a credit to liability for payroll that has not yet been paid at the end of the period.
Entries made at the end of the period to assign revenues to the period in which they are earned and expenses to the period in which they are incurred. Adjusting entries help measure the period's income and bring the related asset and liability accounts to correct balances for the financial statements.
Ensure that a company follows the revenue and expense recognition principles. Adjusting entries are required every time a company prepares financial statements. Adjusting entires are either called deferrals or accruals. Deferrals are prepaid expenses or unearned revenue. The adjusting amount represents the expense incurred or revenue earned in the current accounting period. Accruals record unrecognized revenues earned, and expenses incurred in the current accounting periods.
Costs incurred in a period that are both unpaid and unrecorded
The adjusting entries for recording accrued expenses involve increasing expenses and increasing liabilities.
Cash basis Accounting
Money received is revenue as received. Money disbursed is immediately an expense on the books
Who is most likely to do accounting on a cash basis?
Small companies & Professionals: doctors, lawyers, engineers, accountants. Their checkbook basically reflects income statement.
Using GAAP, can an incoming payment be recorded as revenue?
No. GAAP only allows revenue to be recorded if EARNED IT, You record and recognize revenue even if no money has been received. If money is received in advance, it becomes revenue as earn it.
Accrued Expense aka Accrued Liability
Income statement expenses presented are:.
expenses incurred during the year
Revenue on the income statement are:
revenues earned during the year
If you receive $3000 12/1/12 of rent in advance and rent is $1000 a month, and the entire amount was put into a liability account, what is the original entry?
Prepaid (deferred) Rent $3000
If you receive $3000 12/1/12 of rent in advance and rent is $1000 a month, and the entire amount was put into a liability account, what is the adjusting entry?
Prepaid (deferred) rent $1000
Rent Revenue $1000
If you receive $3000 12/1/12 of rent in advance and rent is $1000 a month, and the entire amount was put into a liability account, you have made an adjusting entry, what are the ending balances in the liability account and the revenue account?
Revenue $1000 Credit
Prepaid (deferred) Rent $2000 on the credit side since it is a liability
If you receive $3000 12/1/12 of rent in advance and rent is $1000 a month, and the entire amount was put into a liability account, you have made an adjusting entry, you have determined the ending balances in the revenue and deferred revenue account, now, what has been the impact on the income statement and balance sheet when you make the adjustment AND what is impact if did NOT make the adjusting entry? NI ASSET LIABILITY (hint: see your adjusting entry)
If made ADJ, REV went up so NI went up
" " " Liability went down so Net Equity went up
If did not: Rev understated and NI UNDERSTATED
" " " : Liabilities overstated and Equity overstated
If you receive $3000 12/1/12 of rent in advance and rent is $1000 a month, and the entire amount was put into an income statement account, what is the original entry?
If you receive $3000 12/1/12 of rent in advance and rent is $1000 a month, and the entire amount was put into an income statement account, what is the year-end adjusting entry?
Deferred Rent $2000
If you receive $3000 12/1/12 of rent in advance and rent is $1000 a month, and the entire amount was put into an income statement account, you have done the adjusting entry so now what are the ending balances on your books? What was the impact of doing the adjustment on your REV, NI, ASSETS, LIABILITIES, EUITY; What if you had forgotten to make the adjustment?
Revenue $1000 credit
Deferred Rent $2000 debit
Adjustment made REV go down so the NI went down
Adjustment made liability go up and equity go down
No adjustment REV overstated NI overstated
No adjustment Liability understated, equity overstated
Prepaid Advertising is $4000: is this an asset or a liability? Revenue or an expense?
Paid cash for advertising expected to be run over the next 4 months. It is an asset because we are owed that money if we don't get the advertising. Once we received 1 month in advertising, we expense $1000 and make sure that the prepaid account is credited for $1000
What is the normal balance for assets?
Define "normal balance"
Normal balance is the side of the T account that increases, For example, always think of the cash account for assets. Cash is debited as money gets deposited. Liabilities, when they increase, normally increases the credit side of the account.
Normal Balance for Owner Equity Accounts is..
What are exceptions to equity accounts? Why do they carry a normal debit balance?
A couple exceptions are Dividends & Treasury stock. Think about what happens to the cash account when there is activity in these accounts...you payout money for dividends so there is a credit to cash. The Dividend account has the opposite entry: a debit. The same occurs with Treasury stock. Remember the cash account entry and that Treasury stock is stock that we buy back to reduce shares outstanding (we sold to raise capital but now we buy some shares back)
A financial statment that presents the revenues and expenses and resulting net income or net loss of a company for a specific period of time
Also called profit. Calculated as the Revenue - Expenses
Accumulated undistributed earnings of a company retained for future needs or for future distribution to its owners.
Retained Earnings Equation
Change in RE = NI - Dividends ; New RE = Old RE + NI - Div
An accrued expense is paid when incurred: True or False
False. Remember that the A in accrued means "after". So, money is paid after en expense occurs
What is the ORDER of Accounts?
An amount earned but for which no money has been received is...
We got money for work that we have not earned yet is ...
pre-paid or called a deferral. Since we owe the work it is a liability on our books
Accruals: Revenue & Expenses
Remember accruals are money "after".
Earned or used are important to remember.
Accrued Expense (used but unpaid)
Accrued Revenue (earned but no money for the work done yet)
Unadjusted Trial Balance
a list of the general ledger accounts and their balances at a particular date.
Unadjusted Trial Balance
A summary listing of the titles and balances of accounts in the ledger prior to the postings of adjusting entries.
Adjusted Trial Balance
A list of all accounts and their adjusted balances to check on the equality of recorded debits and credits
End of Period Adjustments
supplies used, expired rent, depreciation, actual interest, (need to (list more here)
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.
Land and inventory are depreciated true or false
Payment for services not yet performed is accrued or deferred revenue?
Unearned revenue (deferred revenue)
Under accrual basis accounting, revenues in the general ledger have been...
earned, whether paid or not
Unearned revenue is also referred to as...
Cash collected in advance for work to be performed, services to be rendered, or goods to be delivered is a(n). Asset or a liability?
In accrual basis accounting, payment received in advance for work is not revenue. True or False
adjusting entry accounts debit or credit
Supplies Expense xxx
Insurance Expense xxx
Prepaid Insurance xxx
Depreciation Expense xxx
Accum. Depr. -- Equipt. xxx
Unearned Service Revenue xxx
Service Rev. xxx
Accounts Receivable XXX
Service Revenue xxxx
Interest Expense xxx
Interest Payable xxxx
Dr. S&W Exp. Cr. S&W Payable
Format Retained Earnings Statement Beginning Retained Earnings
Add: Net Income
End Retained Earnings
Assets equipment (less:accum. depr. -- equipt), prepaid insurance, supplies, A/R, Cash
Equity Share Cap Ord. & Retained Earnings (Rev -Exp - Dividends)
Unearned Rev xxx
Service Rev. xxx
Dr. Utility Exp xxx
Accounts Payable xxx
temporary accounts close
permanent accounts Assets
Current Assets pre-paid exp.
receivables (notes, accts, interest)
short-term investments (short-term U.S. govt. security)
Deferrals: Revenues & Expenses
Deferred Revenue: we received money before we earned it! Pre-paid revenue is a liability because we may have to give back the money if we don't do the work
Deferred Expense is pre-paid and will be used up eventually. It is an asset on our books
At what dollar amount must a 1099-MISC be filed for a non-employee?
An example of a CONTRA-ACCOUNT :
a. depreciation expense
b. accounts receivable
c. sales revenue
d. accumulated depreciation
d. accumulated depreciation is a contra-asset account; revenues and expenses are used for yielding the company's net income and accounts receivable is simply an asset account
The purpose of closing entries is to transfer:
a. a/c receivable to retained earnings when an account is fully paid
b. balances in temporary accounts to a permanent account
c. inventory to cost of goods sold when merchandise is sold
d. assets and liabilities when operations are discontinued
b. temporary accounts are revenue and expense accounts. They are zero balances at the start of a new fiscal period
Yummy Foods purchased a two-year fire and extended coverage insurance policy on August 1, 2011, and charged the $4,200 premium to Insurance expense. At its December 31, 2011, year-end, Yummy Foods would record which of the following adjusting entries?
pre pd 3325
ins exp 3325
The employees of Neat Clothes work Monday through Friday. Every other Friday the company issues payroll checks totaling $32,000. The current pay period ends on Friday, July 3. Neat Clothes is now preparing quarterly financial statements for the three months ended June 30. What is the adjusting entry to record accrued salaries at the end of June?
salaries exp 22,400
sal payable 22,400
Carolina Mills purchased $270,000 in supplies this year. The supplies account increased by $10,000 during the year to an ending balance of $66,000. What was supplies expense for Carolina Mills during the year?
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