Accounting Chapters 3 & 4

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If a business wants to know its true expenses for the month:

it must consider all expenses incurred, not just expenses paid that month

If a business wants to know how much revenue it has earned:

it must determine the value of services provided, not just the cash received in payment for services rendered.

The accrual basis of accounting dictates that all revenues be recorded when they are earned instead of

when the cash payment is received from customers.

All expenses are to be recorded when they are incurred

not when they are paid.

If a business wants to determine whether their pricing results in adequate profit,

it must compare revenues earned to all expenses incurred in providing services.

The matching concept states that all the expenses incurred must be recorded in the same period that the revenue is recorded.

Expenses are matched against the revenue they generate.

Deferrals adjust accounts that are already a part of a company’s accounting records.

Deferred expenses occur when an asset that will be used up or will expire is purchased.

As this asset (deferred expense) is used,

its cost must be recorded as an expense. Therefore you defer recording the cost of the asset as an expense until it is used.


recorded as an asset when they are purchased. As the supplies are used an adjusting entry is made to transfer the cost of the supplies to an expense account.

Prepaid insurance:

when insurance is paid in advance of the period covered, its cost is recorded as an asset. As the policy expires, an adjusting entry must be made to transfer the cost of the insurance to an expense account.

Revenues are deferred when cash is received before the job is completed.

In this case, the cash cannot be recorded as revenue since it has not yet been earned. Instead it is recorded as a liability until the obligation is fulfilled, then it is revenue.

Unearned revenue is the liability account used to record cash received in advance.


Accrued expenses:

use of utilities before receiving a bill; wages owed to employees at end of accounting period; interest owed on unpaid loans

Accrued revenues:

fees earned by a lawyer that have not been received;

A deferred expense

occurs when you pay for an item before it is used (Supplies, Prepaid Ins)

A deferred revenue

occurs when you receive payment before earning it (Unearned fees, unearned rent)

An accrued expense

occurs when you use an item before paying for it (wages, utilities)

Accrued revenue

occurs when you have earned the revenue but have not received payment (lawyer fees; interest on savings acct)

Accrued means

after the fact

Deferred means

before the fact

Contra-asset account is

Accumulated depreciation (how much worth has the asset worn out)

Normal Balance is accumulated depreciation is always a


Revenues – Expenses =

Net Income

Steps in the Accounting Cycle:

1. Transactions analyzed & recorded in journal 2. Transactions posted in ledger 3. Unadjusted trial balance prepared 4. Adjustment data assembled & analyzed 5. Work sheet prepared 6. Adjusting entries journalized & posted to ledger 7. Adjusted trial balance prepared 8. Financial statements prepared 9. Closing entries journalized and posted to ledger 10. Post-closing trial balance prepared

The closing entries

1. Close revenue acct to Income Summary 2. Close expense accts to Income Summary 3. Balance in Income Summary equals Net Income (if not correct entries from top 2) 4. Close income summary to Capital 5. Close drawing acct to Capital

Which accts do not appear on a post closing trial balance?

revenue, expense, drawing

What accts will appear on a post closing trial balance?

Assets, Liabilities, Capital

Depreciation Expense


Accumulated Depreciation


The account type and normal balance of Prepaid Expense is

asset, debit

Which of the following is not a characteristic of accrual basis of accounting?

Revenues and expenses are reported in the period in which cash is received or paid

Which of the following is not true regarding depreciation?

Depreciation expense reflects the decrease in market value each year.

Fees receivable would appear on the balance sheet as a(n)


Which of the accounting steps in the accounting process below would be completed last?

preparing financial statements

Prepaid advertising, representing payment for the next quarter, would be reported on the balance sheet as a(n)


Accrued revenues would appear on the balance sheet as


Prior to the adjusting process, accrued expenses have

been incurred, not paid, and not recorded

Using accrual accounting, revenue is recorded and reported only

when the services are rendered without regard to when cash is received

The matching concept

states that the revenues and related expenses should be reported in the same period

The revenue recognition concept

determines when revenue is credited to a revenue account

The adjusting entry to record the depreciation of equipment for the fiscal period is

debit Depreciation Expense; credit Accumulated Depreciation

If the effect of the debit portion of an adjusting entry is to increase the balance of an expense account, which of the following describes the effect of the credit portion of the entry?

increases the balance of a liability account

Prior to the adjusting process, accrued revenue has

been earned and not recorded as revenue

Which one of the following accounts below would likely be included in a deferral adjusting entry?

Unearned Revenue

The balance in the office supplies account on June 1 was $7,500, supplies purchased during June were $3,100, and the supplies on hand at June 30 were $2,300. The amount to be used for the appropriate adjusting entry is


The net income reported on the income statement is $58,000. However, adjusting entries have not been made at the end of the period for supplies expense of $2,200 and accrued salaries of $1,300. Net income, as corrected, is


For the year ending December 31, Orion, Inc. mistakenly omitted adjusting entries for $1,500 of supplies that were used, (2) unearned revenue of $4,200 that was earned, and (3) insurance of $5,000 that expired. For the year ending December 31, what is the effect of these errors on revenues, expenses, and net income?

Net income is overstated by $2,300

Which of the accounts below would most likely appear on an adjusted trial balance but probably would not appear on the trial balance?

Depreciation Expense

Which of the following pairs of accounts could not appear in the same adjusting entry?

Interest Income and Interest Expense

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