GAAP
The length of each accounting period must be the same, with a maximum of 12 months.
Time Period Concept
Supplies were recorded at $200, but at the end of the month only $150 worth remains.
Dr Supplies expense 50
Cr Supplies 50
You purchase $50 worth of supplies on account.
Dr supplies 50
Cr accounts payable 50
The first closing entry involves these two accounts.
Dr Revenue
Cr Revenue and Expense Summary
Revenue carries this balance.
Credit
Accountants must report financial statements in terms of a stable currency.
Monetary Unit
We paid for all of next year's insurance one month ago. It is now the year end, what two accounts should be adjusted?
Dr Insurance Expense
Cr Prepaid Insurance
None - not a transaction.
Closing entries effectively reset the accounts on this financial statement.
Income statement
Drawings is an example of this section on the balance sheet.
Owner's equity.
We have completed 10% of the work to fulfill a $100,000 job. Under the revenue recognition principle, we would record this much earned revenue.
$10,000
Name two principles that require adjusting entries be made.
The matching principle.
Revenue Recognition.
Expense Recognition.
The Principle of conservatism.
This transaction occurs when you provide a service worth $250 and receive only $100 in cash
Dr Cash 100
Dr Accounts receivable 150
Cr Service Revenue 250
The revenue and expense summary gets closed to this account.
Capital
The net balance of a prepaid expense (or prepaid asset) account.
Debit
If accounting irregularities are very small or overly costly to fix, this principle allows us to ignore them. (My favourite)
Materiality Principle
This method of depreciation records different amounts every year, with more of the asset being used up early in its life.
These accounts are effected when you receive a $50,000 deposit to replace a client's roof.
Cash
Unearned Revenue
The revenue and expense summary should be the same value as this line on the income statement.
Net income.
This type of account is unearned revenue.
Liability
This principle requires that expenses be recorded in the same period as the revenues they helped to earn.
Matching Principle
We expect that 3% of our accounts receivable are uncollectible, effecting these two accounts.
dr Bad debt expense
Cr Allowance for doubtful accounts
This is the transaction when you record $100 worth of depreciation.
Dr depreciation expense 100
Cr accumulated depreciation 100
Business owners hope their revenue and expense summary carries this balance.
Credit
The term for a special type of asset account which normally carries a net credit balance.
Contra-asset account