RSM220H1 Study Guide - Deferral, Debits And Credits, Fixed Asset

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20 Apr 2012

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Chapter 6
Completing the Accounting Cycle for a
Service Business
A worksheet is used to assist the Accountant in the preparation of the financial statement.
It is used to organize the data for the financial statements. The worksheet provides the
overall picture of the accounting process and so helps to eliminate errors. It is not a
formal statement but it’s the Accountants working papers or rough copy.
The six column worksheet has the column, Account titles, Trial Balance, Incomes
Statement, Balance Sheet page 168
The matching principal states that the revenue of a specific time period should be
matched against expenses incurred in that same time period. Due to this, we have to
adjust our records so that our balances for that time period are correct as well as our
financial statements.
Prepaid Expenses
Expense payments made ahead of time are called prepaid expenses and are classified as
current assets, e.g. rent, insurance, supplies. When they are used up, the asset account
will decrease and will now become an expense. The balance sheet is adjusted and the
income statement will show the expense. This is called an adjusting entry. e.g.
1. Dr. Insurance Exp. 100
Prepaid Insurance 100
2. Dr. Supplies Exp. 600
Supplies 600
Each year most fixed assets except for land tend to lose a portion of their value. The
value that is lost should be allocated to an expense account for that year or accounting
period. The costs or expense is shown in the income statement for that year. The using up
of this fixed asset is called depreciation or amortization. The cost of the fixed asset is
allocated over the useful life of the asset as the value of the asset decreases; the value is
debited to the depreciation expense account which is in the income statement.
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