Free Accounting Flashcards About Ac101 Prof Magnall

There are four financial reports that make up a group known as the financial statements. We will take a walk with one of those reports – the balance sheet – and learn what it is, what items are included on it and what its role in the group is. In this lesson, we’ll define ‘liabilities.’ You’ll also learn the difference between current and long-term liability.

If you are going to pay before the work is performed, credit a/p and debit prepaid expenses. Are you thinking matching principle here? Our employees help us generate revenue. The wages that we pay them must be matched to the revenue they are creating. Therefore, the $4,300 must be recorded in December.

My Account

The amount that is not earned as of December 31 must be reported as a liability on the December 31 balance sheet. If your business is a corporation, and your corporation has declared a dividend payable to shareholders, the declared dividend needs to be recorded on the books. Assuming the dividend will not be paid until after year-end, an adjusting entry needs to be made in the general journal. This lesson will explain the concept of unearned revenue and how it applies in different business settings. It will also explain how and when unearned revenue is recognized and the journal and adjusting entries needed for unearned revenue. In the journal entry, Salaries Expense has a debit of $1,500.

The completed contract method enables a company to postpone recognizing revenue and expenses until a contract is completed. Bad debt is an expense that a business incurs once the repayment of credit previously extended to a customer is estimated to be uncollectible. Harold Averkamp has worked as a university accounting instructor, accountant, and consultant for more than 25 years. He is the sole author of all the materials on AccountingCoach.com. Something has already been entered in the accounting records, but the amount needs to be divided up between two or more accounting periods. If you are logged in to your account, this website will remember which cards you know and don’t know so that they are in the same box the next time you log in.

Adjusting Journal Entries

A credit increases interest payable, which is a liability account that shows the interest you owe to a third party. In this example, debit $300 to the interest expense account and credit $300 to interest payable.

• Assets will be overstated and net income and owner’s equity will be overstated.
• The amount that is not earned as of December 31 must be reported as a liability on the December 31 balance sheet.
• Bad debt is an expense that a business incurs once the repayment of credit previously extended to a customer is estimated to be uncollectible.
• Is the same journal entry as recording revenue on account.

On July 1 the Vinson Shoe Store paid $8,000 to Ace Realty for 4 months rent beginning July 1. Prepaid Rent was debited for the full amount. If financial statements are prepared on July 31, the adjusting entry to be made by the Vinson Shoe Store is A. Debit Rent Expense, $8,000; Credit Prepaid Rent, $2,000.

Determine The Balances Of The Accounts Affected By The Adjusting Entries, And Prepare Obj 2,3,4

If this is the case, then this temporary dividends account needs to be closed at the end of the period to the capital account, Retained Earnings. Notice that the balance of the bookkeeping Income Summary account is actually the net income for the period. Remember that net income is equal to all income minus all expenses. The Income Summary account is temporary.

The two examples of adjusting entries have focused on expenses, but adjusting entries also involve revenues. This will be discussed later when we prepare adjusting journal entries. To demonstrate the need for an accounting adjusting entry let’s assume that a company borrowed money from its bank on December 1, 2013 and that the company’s accounting period ends on December 31. The bank loan specifies that the first interest payment on the loan will be due on March 1, 2014. This means that the company’s accounting records as of December 31 do not contain any payment to the bank for the interest the company incurred from December 1 through December 31. For example, ABC International receives a $500 check payment from a customer for an unpaid invoice on April 30.

Illustration Of Supplies

Under the accrual method of accounting, the amounts received in advance of being earned must be deferred to a liability account until they are earned. More than likely, your accountant will make this adjusting entry for you, or your accountant may be able to provide you with a schedule showing the amount of depreciation for each asset for each year. Some adjusting bookkeeping entries are straightforward. Others require judgment and some accounting knowledge. You will have to decide if you are going to tackle some or all adjusting entries, or if you want your accountant to do them. If your accountant prepares adjusting entries, he or she should give you a copy of these entries so that you can enter them in your general ledger.

It just sounds like a statement, but the matching principle should set off an alarm. The company had a profit for the year of $42,000. Income taxes are an expense of doing business. Should the expense fall in the year that is completed or the year we are currently in? The expense is related to the year that is completed and, therefore, must be recorded as an adjusting entry.

Adjusting Entries Are Dated

The reversing entry removes the liability established on December 31 and also puts a credit balance in the Repairs Expense account on January 2. When the vendor’s invoice is processed in January, it can be debited to Repairs Expenses . If the vendor’s invoice is $6,000 the balance in the account Repairs Expenses will show a $0 balance after the invoice is entered.

If you extend credit to numerous customers, and your experience is that a certain number of your sales on account will be uncollectable, you should probably set up a reserve for bad debts. That way, your books and financial statements will more accurately reflect your true financial picture.

Salaries Payable has a credit balance of $1,500. This is posted to the Salaries Payable T-account on the credit side . In the journal entry, Supplies Expense has a debit of $100.

From the perspective of the check issuer, there should be no journal entry to record the reduction in cash until the date listed on the check. From the perspective of the recipient, there should be no entry to record the increase in cash until the date listed on the check. Thus, the date on the check effectively postpones the underlying accounting transaction. Keep in mind, though, for most small businesses your accountant adjusting entries are dated is also the person who files your tax returns. This means your accountant will likely only be concerned with adjusting entries that impact your tax situation, like depreciation. Make sure you are clear on the purpose of any adjusting entries your accountant or your bookkeeper recommends. The Inventory Loss account could either be a sub-account of cost of goods sold, or you could list it as an operating expense.

The adjusting entry for accrued revenues a. Is the same journal entry as recording revenue on account. normal balance Differs from the journal entry to record revenue on account. Includes a debit to a revenue account.

$100 of supplies were used during January. Supplies is an asset that is decreasing . Employees earned $1,500 in salaries for the period of January 21–January 31 that had been previously unpaid and unrecorded. Printing Plus performed $600 of services during January for the customer from the January 9 transaction. The equipment purchased on January 5 depreciated $75 during the month of January.

Adjusting Entries Defined

This keeps your records current to show how much interest you owe. Adjusting entries are made at the end of the accounting period.

Adjusting Entries And Closing Entries

The adjustment for accrued fees of $16,340 was journalized as a debit to Accounts Payable for $16,430 and a credit to Fees Earned $16,340. The adjustment for depreciation of $3,545 was journalized as debit to Depreciation Expense for $3,454 and a credit to Accumulated Depreciation of $3,545. None of these choices are correct. To determine whether the balance sheet is in balance. To verify the equality of total debit and credit balances.

The expense accounts and withdrawal account will now also be zero. The purpose of closing entries is to prepare the temporary accounts for the next accounting period.

As prepaid expenses expire with the passage of time, the correct adjusting entry will be a A. Debit to an asset account and a credit to an expense account. Debit to an expense account and a credit to an asset account. Debit to an asset account and a credit to an asset account. Debit to an expense account and a credit to an expense account. The adjusted trial balance is prepared a. After adjusting entries are posted but before financial statements are prepared.

A subsequent chapter will cover depreciation in great detail. However, one simple approach is called the straight-line method, where an equal amount of asset cost is assigned to each year of service life. To illustrate, let’s assume that a new company pays $6,000 on December 27 for the insurance on its vehicles for the six-month period beginning January 1. For December 27 through 31, the company should have an asset Prepaid Insurance or Prepaid Expenses of $6,000. The adjustment was posted as a debit to Accounts Receivable for $870 and a credit to Fees Earned for $780.