FINANCIAL ACCOUNTING WELL
WRITTEN EXAM REVISION SUMMARY
adjustments
entries made at the end of every accounting period to
report revenues and expenses in the proper period and
assets and liabilities at appropriate amounts.
revenue recognition principle
revenues are recorded when earned.
expense recognition or "matching" principle
expenses are recorded in the same period as the
revenues to which they relate.
what are assets reported at?
assets are reported at amounts representing economic
benefits that remain at the end of the current period.
what are liabilities reported at?
liabilities are reported at amounts owed that the end of the
current period that will require a future sacrifice of
resources.
two types of adjustments
deferral and accrual
deferral adjustments
an expense or revenue has been deferred if we have
postponed reporting it on the income statement until a
later period.
-deferral adjustments are used to decrease balance sheet
accounts (assets and liabilities) and increase
corresponding income statement accounts (revenues and
,expenses).
-each deferral adjustment involves one asset and one
expense account, or one liability and one revenue
account.
accrual adjustments
accrual adjustments are needed when a company has
earned revenue or incurred an expense in the current
period but has not yet recorded it because the related
cash will not be received or paid until a later period.
-accrual adjustments are used to record revenue or
expenses when they occur prior to receiving or paying
cash, and to adjust corresponding balance sheet
accounts.
-each accrual adjustments involves one asset and one
revenue account, or one liability and one expense
account.
adjusting journal entries
record the effects of each period's adjustments in a debits-
equal-credits format.
steps for making required adjustments
1. Analyze- determine the necessary adjustments
2. Record- record using adjusting journal entries
3. Summarize- summarize in the accounts
-an adjusted trial balance is prepared to ensure total
debits still equal total credits after having posted the
adjusting journal entries to the accounts.
-if the trial balance is in balance, the financial statements
can be prepared and then distributed to interested users.
Analyze
in order to complete this step you need to know the
balance currently reported in each account, then
, determine what should be reported as the balance, and
then figure out the adjustment that will take you from the
current unadjusted balance to the desired adjusted
balance.
supplied used during the period
the expense recognition principle requires an adjustment
be made to report the cost of supplies used up this month
as an expense (to match against revenue).
rent benefits expired during the period
-credit prepaid rent for the amount used up
-debit rent expense for the amount used up
-adjust the prepaid rent balance and the rent expense
balance to equal the new amounts
two effects of deferral adjustments
1. they reduce the carrying value of assets on the balance
sheet.
2. they transfer the amount of the reductions to related
expense accounts on the income statement.
carrying value
the amount at which an asset or liability is reported in the
financial statements. its also known as "net book value" or
simply "book value"
depreciation
the process of allocating the cost of buildings, vehicles,
and equipment to the accounting periods in which they are
used.
contra-account
an account that is an offset to, or reduction of, another
account.
cost of equipment used in the current period
WRITTEN EXAM REVISION SUMMARY
adjustments
entries made at the end of every accounting period to
report revenues and expenses in the proper period and
assets and liabilities at appropriate amounts.
revenue recognition principle
revenues are recorded when earned.
expense recognition or "matching" principle
expenses are recorded in the same period as the
revenues to which they relate.
what are assets reported at?
assets are reported at amounts representing economic
benefits that remain at the end of the current period.
what are liabilities reported at?
liabilities are reported at amounts owed that the end of the
current period that will require a future sacrifice of
resources.
two types of adjustments
deferral and accrual
deferral adjustments
an expense or revenue has been deferred if we have
postponed reporting it on the income statement until a
later period.
-deferral adjustments are used to decrease balance sheet
accounts (assets and liabilities) and increase
corresponding income statement accounts (revenues and
,expenses).
-each deferral adjustment involves one asset and one
expense account, or one liability and one revenue
account.
accrual adjustments
accrual adjustments are needed when a company has
earned revenue or incurred an expense in the current
period but has not yet recorded it because the related
cash will not be received or paid until a later period.
-accrual adjustments are used to record revenue or
expenses when they occur prior to receiving or paying
cash, and to adjust corresponding balance sheet
accounts.
-each accrual adjustments involves one asset and one
revenue account, or one liability and one expense
account.
adjusting journal entries
record the effects of each period's adjustments in a debits-
equal-credits format.
steps for making required adjustments
1. Analyze- determine the necessary adjustments
2. Record- record using adjusting journal entries
3. Summarize- summarize in the accounts
-an adjusted trial balance is prepared to ensure total
debits still equal total credits after having posted the
adjusting journal entries to the accounts.
-if the trial balance is in balance, the financial statements
can be prepared and then distributed to interested users.
Analyze
in order to complete this step you need to know the
balance currently reported in each account, then
, determine what should be reported as the balance, and
then figure out the adjustment that will take you from the
current unadjusted balance to the desired adjusted
balance.
supplied used during the period
the expense recognition principle requires an adjustment
be made to report the cost of supplies used up this month
as an expense (to match against revenue).
rent benefits expired during the period
-credit prepaid rent for the amount used up
-debit rent expense for the amount used up
-adjust the prepaid rent balance and the rent expense
balance to equal the new amounts
two effects of deferral adjustments
1. they reduce the carrying value of assets on the balance
sheet.
2. they transfer the amount of the reductions to related
expense accounts on the income statement.
carrying value
the amount at which an asset or liability is reported in the
financial statements. its also known as "net book value" or
simply "book value"
depreciation
the process of allocating the cost of buildings, vehicles,
and equipment to the accounting periods in which they are
used.
contra-account
an account that is an offset to, or reduction of, another
account.
cost of equipment used in the current period
