Accrual vs. Cash Basis
What is the key difference between cash basis and accrual basis accounting?
Timing of revenue/expense recognition (cash vs. when earned/incurred).
What type of account is Prepaid Insurance before adjustment
Asset
These expenses have happened but the company hasn’t sent a payment or recorded them yet. What are they?
Accrued expenses
What is prepared first: balance sheet or income statement?
What are temporary accounts?
Revenues, expenses, dividends, income summary.
Under cash basis, when is revenue recorded?
Only when cash is received.
If $2,400 is paid for 24 months of insurance, how much is expensed each month?
$100
FastForward owes $70/day. At 12/31, 3 days unpaid. Record the adjusting entry.
Dr Salaries Expense $210, Cr Salaries Payable $210.
Net income flows into which statement next?
Statement of retained earnings
What is the purpose of closing entries?
Reset temporary accounts and update retained earnings.
A company pays for electricity at the end of the month, but uses it throughout the month. Under accrual accounting, when is the expense recognized?
In the month the electricity is used, not when paid.
Supplies purchased $9,720, year-end count $8,670. What is Supplies Expense?
$1,050
Accrued revenues are __________ and __________.
Earned but not yet received/recorded.
Which accounts appear on the post-closing trial balance?
Only permanent accounts (assets, liabilities, equity).
Which types of accounts are never closed?
Permanent accounts (assets, liabilities, equity).
Why does accrual accounting provide a more accurate picture of performance?
It matches revenues and expenses in the same period.
Unearned Consulting Revenue is originally recorded as a liability. After earning part of it, what accounts are affected?
Debit Unearned Revenue, Credit Consulting Revenue.
On 12/31, FastForward has earned $1,800 consulting revenue not yet billed. What is the adjusting entry?
Dr Accounts Receivable $1,800, Cr Consulting Revenue $1,800.
Adjusted Trial Balance totals must always:
Equal (debits = credits).
What is the last step in the accounting cycle?
Prepare post-closing trial balance.
GAAP requires which basis of accounting?
Accrual basis.
Give two examples of deferred expenses.
Prepaid rent, supplies, prepaid insurance.
Why do accrual adjustments affect both a balance sheet and an income statement account?
They link timing differences—one asset/liability + one revenue/expense.
List the 4 financial statements in order.
(1) Income statement, (2) Retained earnings, (3) Balance sheet, (4) Cash flow statement.
List the 4 steps of the closing process.
(1) Close revenues to income summary, (2) Close expenses to income summary, (3) Close income summary to retained earnings, (4) Close dividends to retained earnings.