Question

LOL What is the difference between cash basis accounting and accrual basis accounting a) Which method records transactions only when cash is received? b) Which method records transaction when it occurs, regardless of when the cash is paid? L02. What concepts and principles apply to accrual basis accounting a) Match the concept (by number) to the correct terminology. 1. Time period concept 2. Revenue recognition principle 3. Matching Principle 4. Fiscal year __An accounting time period that may not coincide with the calendar year. Requires companies to record revenue when the entity satisfies each performance obligation. Assumes that a business's activities can be sliced into small time segments and that financial statements can be prepared for specific periods of time. Guides accounting for expenses, ensures that all expenses recorded when they are incurred during a period. Records expenses with the associated revenue in the same period. LO3. What are adjusting entries a) Give an example of a deferred expense. b) If a piece of equipment costs $10,000 and has a useful life of 5 years, what is the depreciation expense for the first year using the straight-line method? Assume no residual value. c) Using the information in the question above, what is the book value at the end of year 1? d) What is the journal entry for receiving cash from customers of $1,000 in advance for concert tickets before the concert has taken place? Date Accounts and Explanation Debit Credis c) Give an example of an accrued expense.

Answer 1

L-01

The difference between cash and accrual accounting

The difference between cash and accrual accounting lies in the timing of when sales and purchases are recorded in your accounts. Cash accounting recognizes revenue and expenses only when money changes hands, but accrual accounting recognizes revenue when it’s earned, and expenses when they’re billed (but not paid).

Basis above, we have answered a and b parts :

a) Cash Accounting b) Accrual accounting

L-02

a) Fiscal year is an accounting time period which may not coincide with the calendar year.

b) Revenue Recognition principle requires the company to record revenue when each performance obligation is satisified.

c) Time period concept assumes that a business's activities can be sliced into small time segments and that financial statements can be prepared for specific periods of time.

d) Matching principle ensures that expenses in a particular period are recorded with the associated revenues of that period.

L-03

In accounting/accountancy, adjusting entries are journal entries usually made at the end of an accounting period to allocate income and expenditure to the period in which they actually occurred.

a) A deferred expense is a cost that has already been incurred, but which has not yet been consumed. As an example of a deferred expense, ABC International pays $10,000 in April for its May rent. It defers this cost at the point of payment (in April) in the prepaid rent asset account.

b) Depreciation expense as per Straight Line Method = Cost of asset / Useful life = 10,000 $ / 5 years = 2000 $ per year.

c) Book value at end of year 1 = Original cost - Depreciation for Year 1 = 10,000 - 2,000 = 8,000 $

d) Journal entry for advance of 1,000 $ received from customer is as follows :

Date	Accounts	Debit ($)	Credit ($)
1/1/XX	Cash A/c .. Dr	1,000
	To Unearned revenue / Advance from customer		1,000

L-04.

An adjusted trial balance is a listing of the ending balances in all accounts after adjusting entries have been prepared. The intent of adding these entries is to correct errors in the initial version of the trial balance and to bring the entity's financial statements into compliance with an accounting framework, such as Generally Accepted Accounting Principles or International Financial Reporting Standards.

Once all adjustments have been made, the adjusted trial balance is essentially a summary-balance listing of all the accounts in the general ledger - it does not show any detail transactions that comprise the ending balances in any accounts. The adjusting entries are shown in a separate column, but in aggregate for each account; thus, it may be difficult to discern which specific journal entries impact each account.

The adjusted trial balance is not part of the financial statements - rather, it is an internal report that has two purposes:

• To verify that the total of the debit balances in all accounts equals the total of all credit balances in all accounts; and

• To be used to construct financial statements (specifically, the income statement and balance sheet; construction of the statement of cash flows requires additional information)

a) Difference between unadjusted and adjusted trial balance :

1.Adjusted trial balance is used after all the adjustments have been made to the journal while an unadjusted trial balance is used when the entries are not yet considered final in a certain period.
2.An unadjusted trial balance is basically used before all the adjustments will be made. The adjusted kind, on the other hand, is used when adjusting the two sides of the ledger – the debit and credit.
3.An adjusted trial balance shows an additional account regarding the net/loss of income.

L-05. Impact of adjusting entries on financial statements is explained below by individually explaining the impact on each component of financial statements :

Impact on the Income Statement

The income statement is used to measure the flow of revenues and expenses over a period of time. Adjusting entries aim to match the recognition of revenues with the recognition of the expenses used to generate them. A company’s net income will increase when revenues are accrued or when expenses are deferred and decrease when revenues are deferred or when expenses are accrued.

Impact on the Balance Sheet

The balance sheet is a snapshot of a company’s financial position at a particular point. Correcting timing differences on the income statement will also correct the corresponding balance sheet items. For instance, if the company pays interest expense on January 15 that was due on December 31, the company would accrue interest expense on the income statement and interest payable on the balance sheet.

Impact on the Statement of Cash Flows

Adjusting entries will not impact a company’s statement of cash flows in a meaningful way. This is because the statement of cash flows is designed to demonstrate a company’s performance without accounting estimates and adjustments. The first item on the statement of cash flows is net income. Accruals and deferrals can increase or decrease net income, but they are also reversed through adjustments in the operating activities section on the statement of cash flows. So, the impact of adjusting entries on net income is reversed before "Net Cash Flows from Operating Activities,” the first important subtotal; it has no impact on the company's ending cash position.

a) Adjustment of Prepaid expense : If such an adjustment is missing, it would cause assets to be overstated and income to be overstated as well.

b) Adjustment for recording accrued income : If such an adjustment is missing, it would cause assets to be understated and income to be understated as well.