ACCT20200 Chapter Notes - Chapter 2: Deferred Income, Retained Earnings, Revenue Recognition

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periwinklechimpanzee451

27 Aug 2020

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Accountancy

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ACCT20200

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hums

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Chapter 2: The Accounting Cycle during the period

● Accounting cycle: full set of procedures used to accomplish the

measurement/communication process of financial accounting

● External transactions: are conducted between the company and a separate economic

entity

○ Internal transactions don’t include an exchange with a separate entity

● Six steps in Measuring External Transactions

1. Source documents to identify externally-affected accounts

2. Analyze the transactions’ impact on the accounting equation

a. Account: record of the business activities related to a part. Item

b. Chart of accounts: list of all accounts

3. Assess whether the transaction results in a debit or credit to account

balances

4. Record the transaction in a journal using debits and credits

5. Post the transaction to the general ledger

6. Prepare a trial balance

● Each transaction will have a dual effect on the basic accounting equation

○ Retained earnings can be expanded into; Revenues - (expenses + dividends)

● Revenue recognition principle: companies recognize revenue at the time they provide the

goods and services to customers

○ The amount of revenue to recognize =amount company is entitled to receive from

customers

○ Receiving cash in advance causes cash and deferred revenue to increase

● Debit: left hand side of the equation

○ Increases in assets

○ Decreases in liabilities and stockholders equity

○ Debit to an expense = debit to retained earnings

● Credit: right hand side of the equation

○ Increases in liabilities and stockholders equity

○ Decreases in assets

● Journal: provides a chronological record of all transactions affecting the firm

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Document Summary

Chapter 2: the accounting cycle during the period. Accounting cycle: full set of procedures used to accomplish the measurement/communication process of financial accounting. External transactions: are conducted between the company and a separate economic entity. Internal transactions don"t include an exchange with a separate entity. Six steps in measuring external transactions: source documents to identify externally-affected accounts, analyze the transactions" impact on the accounting equation, account: record of the business activities related to a part. Each transaction will have a dual effect on the basic accounting equation. Retained earnings can be expanded into; revenues - (expenses + dividends) Revenue recognition principle: companies recognize revenue at the time they provide the goods and services to customers. The amount of revenue to recognize =amount company is entitled to receive from customers. Receiving cash in advance causes cash and deferred revenue to increase. Debit: left hand side of the equation. Debit to an expense = debit to retained earnings.

Related Questions

2.5. Match the following terms with their definitions.

Term

_____a. dataprocessing cycle

_____b. source documents

_____c. turnaround documents

_____d. source data automation

_____e. general ledger

_____f. subsidiary ledger

_____g. control account

_____h. coding

_____i. sequence code

_____j. block code

_____k. groupcode

_____l. mnemonic code

_____m. chart ofaccounts

_____n. general journal

_____o. specialized journal

_____p. audittrail

_____q. entity

_____r. attribute

_____s. field

_____t. record

_____u. datavalue

_____v. master file

_____w. transactionfile

_____x. database

_____y. batchprocessing

_____z. online, real-time processing

Definition

1. Contains summary-level data for every asset, liability, equity,revenue, and expense account

2. Items are numbered consecutively to account for all items; missingitems cause a gap in the numerical sequence

3. Path of a transaction through a data processing system from pointof origin to final output, or backward from final output to pointof origin

4. List of general ledger account numbers; allows transaction data tobe coded, classified, and entered into proper accounts; facilitatespreparation of financial statements and reports

5. Contents of a specific field, such as âGeorgeâ in a name field

6. Portion of a data record that contains the data value for aparticular attribute, like a cell in a spreadsheet

7. Company data sent to an external party and then returned to thesystem as input

8. Used to record infrequent or nonroutine transactions

9. Characteristics of interest that need to be stored

10. Thesteps a company must follow to efficiently and effectively processdata about its transactions

11. Something about which information is stored

12. Storescumulative information about an organization; like a ledger in amanual AIS

13. Contains detailed data for any general ledger account with manyindividual subaccounts

14. Contains records of individual business transactions that occurduring a specific time period

15. Updating each transaction as it occurs

16. Devicesthat capture transaction data in machine-readable form at the timeand place of their origin

17. Used torecord large numbers of repetitive transactions

18. Set ofinterrelated, centrally coordinated files

19. Two ormore subgroups of digits are used to code items

20. Updating done periodically, such as daily

21. Systematic assignment of numbers or letters to items to classifyand organize them

22. Lettersand numbers, derived from the item description, are interspersed toidentify items; usually easy to memorize

23. Initialrecord of a transaction that takes place; usually recorded onpreprinted forms or formatted screens

24. Fieldscontaining data about entity attributes; like a row in aspreadsheet

25. Sets ofnumbers are reserved for specific categories of data

26. Thegeneral ledger account corresponding to a subsidiary ledger, wherethe sum of all subsidiary ledger entries should equal the amount inthe general ledger account

fuchsiahorse793

QUESTION 1

Accounting is an information and measurement system thatidentifies, records, and communicates relevant, reliable, andcomparable information about an organization's businessactivities.

True

False

QUESTION 2

We use the accounting equation to identify what a company ownsand owes. The accounting equation is:

Assets = Liabilities + Equity

Assets = Liabilities â Equity

Assets = Liabilities + Revenues

Equity = Liabilities + Revenues

QUESTION 3

______ are beliefs that distinguish right from wrong. Thesebeliefs are accepted standards of gauging good and dishonestbehavior.

Accounting Standards

Ethics

Generally Accepted Accounting Principles

FASB

QUESTION 4

The _____ is a collection of all accounts within a companyâsaccounting system.

We use the accounting equation to identify what a company ownsand owes. _____ are resources a company owns or controls, _____ areclaims creditors have against a companyâs assets, and _____ is theownerâs claim on a companyâs assets.

QUESTION 6

In double entry accounting a credit to an asset account willrepresent an increase in the asset account balance; and a debitwill represent a decrease in the asset account balance.

True

False

QUESTION 7

The purchase of supplies on credit will ____ assets and ____liabilities.

During the accounting cycle, we analyze transactions toprepare statements.

True

False

QUESTION 9

The supplies account for a company has a $1,000 debit balanceat the beginning of the year. Supplies of $2,000 were purchasedduring the year and debited to the Supplies account. A December 31physical count shows $500 of supplies remaining at the end of theyear. Assume no other adjusting entries are made during the year.Using the 3-step process for creating adjusting entries, calculatethe adjustment amount for supplies (no journal entry isrequired).

During the accounting cycle, to complete step 7 youwould:

Prepare post-closing trial balance--Test clerical accuracy ofthe closing procedures.

Prepare adjusted trial balance--Summarize adjusted ledgeraccounts and amounts.

Prepare statements--Use adjusted trial balance to preparefinancial statements.

Close--Journalize and post entries to close temporaryaccounts.

QUESTION 11

The three financial statements that should be prepared duringthe accounting cycle are the:

Balance sheet, adjusted trial balance, income statement

Balance sheet, unadjusted trial balance, Statement of OwnerâsEquity

Income statement, adjusted trial balance, Statement of OwnerâsEquity

Balance sheet, Income statement, Statement of OwnerâsEquity

QUESTION 12

An optional working paper, which is not a required report oran accounting record, but is used to prepare a company's unadjustedtrial balance, adjusting entries, adjusted trial balance, andfinancial statements is a(n):

Adjusted trial balance

Worksheet

Post-closing trial balance

Unadjusted trial balance

General ledger

QUESTION 13

The two goals for completing the closing process are:

To identify accounts for closing and record the closingentries

To journalize and post transactions

To post transactions and prepare post-closing trialbalance

To reset revenues, expenses, and withdrawal account balancesto zero at the end of each period, and help summarize an accountingperiodâs revenues and expenses.

QUESTION 14

Fill in the Blank: The _____ describes a companyâs financialposition â by the types and amounts of assets, liabilities, andequity -- at a point in time.

QUESTION 15

Return on Assets is useful in evaluating management, analyzingand forecasting profits, and planning activities.

True

False

QUESTION 16

The Income Statement:

Identifies cash inflows (receipts) and cash outflows(payments) over a period-of-time.

Summarize adjusted ledger accounts and amounts

Describes a companyâs revenues and expenses along with theresulting net income or net loss -- over a period-of-time due toearnings activities

Resets revenues, expenses, and withdrawal account balances tozero at the end of each period.

QUESTION 17

An internal control system consists of the policies andprocedures used to:

Protect assets and Ensure reliable accounting

Urge adherence to company policies and Promote efficientoperations

All of the above

None of the above.

QUESTION 18

The cost-benefit principle is the second limitation of_______.

Bank reconciliations

Petty cash controls

Voucher system of controls

Internal controls

QUESTION 19

The Unadjusted Trial Balance columns of a company's work sheetshows the Store Supplies account with a balance of $750. TheAdjustments columns shows a credit of $425 for supplies used duringthe period. The amount shown as Store Supplies in the Balance Sheetcolumns of the work sheet is:

A company shows a $600 balance in Prepaid Rent in theUnadjusted Trial Balance columns of the work sheet. The Adjustmentscolumns show expired rent of $200. This adjusting entry resultsin:

$200 decrease to net income

$200 increase to net income

$200 different between the debit and credit columns of theUnadjusted Trial Balance

An error in the Balance Sheet

QUESTION 21

This semester we have discussed four major financialstatements. List the 4 financial statements and describe them. Makesure to include how they flow together.

QUESTION 22

Explain the purpose of adjusting entries at the end of aperiod.

peararmadillo281

I. The basic parts of a joborder costing system are the:

A. Cost______________ and _________________ procedures.

B. ____________________ documents.

C. Accountsthat a company uses when it incurs costs for direct ____________,direct ________________, and ___________________.

II. Accounting for materialsrequires three types of entries.

A. With the ______________ of materials,debit Materials Inventory and credit Accounts Payable.

B. With the _______________ of directmaterials to ________________, debit Work in Process Inventory andcredit Materials Inventory.

C. With the transfer of__________________ materials to production, debit Overhead andcredit Materials Inventory.

III. Accounting for labor requirestwo types of entries.

A. For payroll costs incurred for_____________ labor, debit Work in Process Inventory and creditPayroll Payable.

B. For payroll costs incurred for_______________ labor, debit Overhead and credit PayrollPayable.

IV. Accounting for other overhead requires twotypes of entries.

A. Other overhead includes plant____________, property _____________, insurance, and_______________.

B. To record _____________ overhead costs,debit Overhead and credit Cash or Accumulated Depreciation.

C. To record _____________ overheadcosts, debit Work in Process Inventory and credit Overhead.

D. The actual (debits) and estimated(credits) overhead costs are ________________ at the end of theperiod to determine the accuracy of overhead costrecognition.

V. To recordthe transfer of ________________ units, debit Finished GoodsInventory and credit Work in Process Inventory.

VI. When a companyuses a perpetual inventory system, two accounting entries are madewhen products are sold.

A. To record the sold productâs________________, debit Accounts Receivable (or Cash) and creditSales.

B. To record the sold productâsassociated ____________, debit Cost of Goods Sold and creditFinished Goods Inventory.

VII. Each job in production has a job order_________________.

A. Hasspace for direct materials, direct labor, and overhead costs.

B. Includesthe job order number, product specifications, customer name, dateof order, projected completion date, and a cost summary.

C. Forincomplete jobs, they make up the _______________ ledger for theWork in Process Inventory account.

D. When ajob is completed, the costs are totaled on the_____________________.

1. Unit cost is computed to_____________ items in inventory.

2. Product ___________Cost = Total Costs for Job Ã· Number of Good Units Produced

VIII. Job order costing systems are also used in______________ organizations.

A. Job ordercost cards track ________________ contracts.

IX. Overhead costs are allocated in foursteps.

A. Step 1: _____________ the overheadrate.

1. A ________________ overheadrate is calculated as estimated overhead costs divided by estimatedcost driver activity.

B. Step 2:______________ the overhead rate.

1. Costs are assigned by multiplyingthe actual cost _____________ activity by the predeterminedoverhead rate.

C. Step 3:Record ________________ overhead costs

D. Step 4:_________________ applied and actual overhead amounts

1. Ifover- or underapplied amounts are minimal, credit or debit_________________.

2. Ifover- or underapplied amounts are material, adjustments should bemade to the inventory accounts affected.

X. The__________________ approach to applying overhead costs is to use asingle plantwide rate.

XI. The moreaccurate _____________________ approach to applying overhead costscreates many smaller activity pools and establishes separate ratesfor each pool.

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ACCT20200 Chapter Notes - Chapter 2: Deferred Income, Retained Earnings, Revenue Recognition

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