Accounting 101 – Ch. 3 & 4

The time period assumption assumes that the economic life of a business is divided into artificial time periods.

Accrual-basis accounting means that companies record events that

Companies make adjusting entries at the end of an accounting period.Such entries ensure that companies record revenues in the period in which they are earned and that they recognize expenses in the period in which they are incurred.

The major types of adjusting entries are deferrals -prepaid expenses and unearned revenues - , and accruals - accrued revenues and accrued expenses.

Deferrals are either prepaid expenses or unearned revenues. Companies make adjusting entries for deferrals to record the portion of the prepayment that represents the expense incurred or the revenue earned in the current accounting period.

An adjusted trial balance shows the balances of all accounts, including those that have been adjusted, at the end of an accounting period. Its purpose is to prove the equality of the total debit balances and total credit balances in the ledger after all adjustments.

Accounting basis in which companies record transactions that change a company's financial statements in the periods in which the events occur.

Adjusting entries for either accrued revenues or accrued expenses

Expenses incurred but not yet paid in cash or recorded.

Revenues earned but not yet received in cash or recorded.

A list of accounts and their balances after the company has made all adjustments

Entries made at the end of an accounting period to ensure that companies follow the revenue recognition and matching principles

The difference between the cost of a depreciable asset and its related accumulated depreciation.

An accounting period that extends from January 1 to December 31.

Accounting basis in which companies record revenue when they receive cash and an expense when they pay cash.

An account offset against an asset account on the balance sheet

Adjusting entries for either prepaid expenses or unearned revenues.

The allocation of the cost of an asset to expense over its useful life in a rational and systematic manner

An accounting period that is one year in length.

Monthly or quarterly accounting time periods.

The principle that companies match efforts (expenses) with accomplishments (revenues).

Expenses paid in cash that benefit more than one accounting period and that are recorded as assets.

The principle that companies recognize revenue in the accounting period in which it is earned.

An assumption that accountants can divide the economic life of a business into artificial time periods

Cash received and recorded as liabilities before revenue is earned.

The length of service of a long-lived asset

Completing the Accounting Cycle

The steps in preparing a worksheet are: (a) Prepare a trial balance on the worksheet. (b) Enter the adjustments in the adjustments columns. (c) Enter adjusted balances in the adjusted trial balance columns. (d) Extend adjusted trial balance amounts to appropriate financial statement columns. (e) Total the statement columns, compute net income (or net loss), and complete the worksheet.

Closing the books occurs at the end of an accounting period.The process is to journalize and post closing entries and then rule and balance all accounts. In closing the books, companies make separate entries to close revenues and expenses to Income Summary, Income Summary to Retained Earnings, and Dividends to Retained Earnings. Only temporary accounts are closed.

A post-closing trial balance contains the balances in permanent accounts that are carried forward to the next accounting period. The purpose of this trial balance is to prove the equality of these balances.

The required steps in the accounting cycle are: (1) analyze business transactions, (2) journalize the transactions, (3) post to ledger accounts, (4) prepare a trial balance, (5 journalize and post adjusting entries, (6 prepare an adjusted trial balance, (7)prepare financial statements, (8) journalize and post closing entries, and (9) prepare a post-closing trial balance.

One way to determine the correcting entry is to compare the incorrect entry with the correct entry. After comparison, the company makes a correcting entry to correct the accounts. An alternative to a correcting entry is to reverse the incorrect entry and then prepare the correct entry.

A classified balance sheet categorizes assets as current assets;long-term investments; property, plant, and equipment; and intangibles. Liabilities are classified as either current or long-term. There is also a stockholders' (owners') equity section, which varies with the form of business organization.

A balance sheet that contains a number of standard classifications or sections

Entries made at the end of an accounting period to transfer the balances of temporary accounts to a permanent stockholders' equity account, Retained Earnings

Entries to correct errors made in recording transactions.

Assets that a company expects to convert to cash or use up within one year

Obligations that a company expects to pay from existing current assets within the coming year

A temporary account used in closing revenue and expense accounts

Noncurrent assets that do not have physical substance.

The ability of a company to pay obligations expected to be due within the next year

Generally, investments in stocks and bonds of other companies that companies normally hold for many years. Also includes long-term assets, such as land and buillings, not currently being used in operations.

Obligations that a company expects to pay after one year.

The average time that it takes to go from cash to cash in producing revenues

Accounts that relate to one or more accounting periods. Consist of all balance sheet accounts. Balances are carried forward to next accounting period.

A list of permanent accounts and their balances after a company has journalized and posted closing entries.

Assets with relatively long useful lives, currently being used in operations

An entry, made at the beginning of the next accounting period, that is the exact opposite of the adjusting entry made in the previous period

The ownership claim of shareholders on total assets. It is to a corporation what owner's equity is to a proprietorship

Accounts that relate only to a given accounting period. Consist of all income statement accounts and the Dividends account. All temporary accounts are closed at end of accounting period

A multiple-column form that may be used in making adjusting entries and in preparing financial statements.

Reversing entries are the opposite of the adjusting entries made in the preceding period. Some companies choose to make reversing entries at the beginning of a new accounting period to simplify the recording of later transactions related to the adjusting entries. In most cases, only accrued adjusting entries are reversed.