| A | B |
|---|
| deferral | created by recording a transaction in a way that delays the recognition of an expense or a revenue |
| common types of deferrals | prepaid expenses or deferred expenses, unearned revenues or deferred revenues |
| prepaid expenses (deferred expenses) | items that initially have been recorded as assets but are expected to become expenses over time through the normal operation of the business |
| deferred revenues (unearned revenues) | items that have initially been recorded as liabilities but are expected to become revenues over time or through the normal operation of the business |
| Accruals | are created when a revenue or expense has been earned or incurred, but has not been recorded at the end of an accounting period. Usually are the result of revenue being earned or an expense being incurred before any cash is received or paid. (i.e. employees earn wages before the end of the year, but are not paid until after year-end.) |
| Accrued expenses (accrued liabilities) | Expenses that have been incurred but have not been recorded in the accounts (interest on notes payable at the end of a period) |
| Accrued revenues (accrued assets) | revenues that have been earned but have not been recorded in the accounts (i.e. attorney has charged a fee but not billed to the client at the end of the period) |
| Would big companies use cash basis or accrual basis of accounting? | Generally accepted accounting principles require all but very small businesses to use the accrual basis of accounting. This is because the accrual basis provides for a better analysis and in-terpretation of profitability of the business as reported on the income statement. |
| How are revenues and expenses reported on the income statement under the cash basis of accounting? | Under the cash basis of accounting, revenues are reported in the period in which cash is received, and expenses are reported in the period in which cash is paid. |
| How are revenues and expenses reported on the income statement under the accrual basis of accounting? | Under the accrual basis of accounting, revenues are reported in the period in which they are earned, and expenses are reported in the period in which they are incurred in producing revenues. |
| Which accounts would appear only in an accrual basis accounting system? | Accounts payable, accounts receivable |
| Which accounts would appear only in both accrual and cash basis accounting? | Capital stock, fees earned, land, utilities expense |
| What value of land balance should be reported on the balance sheet? | You should report the land balance before the accounts have been adjusted. Land needs no adjustment at the end of the period. |
| What value of supplies balance should be reported on the balance sheet? | You should not report the supplies balance before the accounts have been adjusted. Supplies before adjustments normally represents the cost of the supplies at the beginning of the period plus the cost of the supplies purchased during the period. Some of the supplies have been used; therefore, an adjustment is necessary for the supplies used before the amount for the balance sheet is determined. |
| Why are adjustments needed at the end of an accounting period? | Adjustments are necessary at the end of an accounting period to bring accounts up to date prior to preparing financial statements. |
| What are the 4 different categories of adjustments frequently required at the end of an accounting period? | Four different categories of adjustments include deferred expenses (prepaid ex-penses), deferred revenues (unearned reve-nues), accrued expenses (accrued liabilities), and accrued revenues (accrued assets). |
| If you adjust to increase the balance of a liability account, which is the effect of the adjustment on the other account? | Increases the balance of an expense account. |
| If you make an adjustment to increase the balance of an asset account, what is the effect of the adjustment on the other account? | Increases the balance of a revenue account. |
| Does every adjustment have an effect on determining the amount of net income for a period? | Yes, because every adjustment affects expenses or revenues. |
| Explain the purpose of Depreciation Expense and Accumulated Depreciation | The portion of the cost of a fixed asset deducted from revenue of the period is recorded by increasing Depreciation Expense. It is the expired cost for the period. The reduction in the fixed asset account is recorded by increasing Accumulated Depreciation rather than decreasing the fixed asset account. The use of the contra asset account facilitates the presentation of original cost and accumulated depreciation for tax and other purposes. |
| Is it customary for the balances of Depreciation Expense and Accumulated Depreciation to be equal? | No, it is not customary for the balances of the two accounts to be equal in amount. Depreciation expense represents the current-year portion of the fixed asset cost that has expired. Accumulated Depreciation is the cumulative depreciation of the asset up to that point in time. |
| In what financial statements will Depreciation Expense and Accumulated Depreciation appear? | Depreciation Expense appears in the income statement; Accumulated Depreciation appears in the balance sheet. |
| In a balance sheet, describe the nature of the assets that compose the current assets section | Current assets are composed of cash and other assets that may reasonably be expected to be realized in cash or sold or consumed in the near future through the normal operations of the business. |
| In a balance sheet, describe the nature of the assets that compose the property, plant, and equipment | Property, plant, and equipment are composed of assets used in the business that are of a permanent or relatively fixed nature. |
| Basic steps in the accounting cycle | (1) Identifying, analyzing, and recording the effects of transactions on the accounting equation, (2) Identifying, analyzing, and recording adjustment data, (3) Preparing financial statements |
