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Unformatted text preview: Characteristics Assumptions Principles Constraints Understandability Relevance Comparability Reliability Monetary unit Economic entity Time period Going concern Revenue recognition Matching Full disclosure Cost Materiality Cost-beneft KIMMEL RAPID REVIEW Financial Accounting: Tools for Business Decision-Making , Third Canadian Edition ACCOUNTING CONCEPTS (Chapters 1-4) ADJUSTING ENTRIES (Chapter 4) Type Original Entry Adjusting Entry Prepayments 1. Prepaid expenses Asset account Cash Expense account Asset account 2. Unearned revenues Cash Liability account Liability account Revenue account Accruals 1. Accrued revenues No entry Asset account Revenue account 2. Accrued expenses No entry Expense account Liability account Note: 1. Each adjusting entry will affect one or more statement of earnings accounts and one or more balance sheet accounts. 2. Adjusting entries never include the Cash account. Interest Calculation Interest = Face value Annual interest rate Time (# of months 12) CLOSING ENTRIES (Chapter 4) Purpose 1. Update the Retained Earnings account by transferring net earnings (loss) and dividends to retained earnings. 2. Prepare the temporary accounts (revenue, expense, dividends) for the next periods postings by reducing their balances to zero. ACCOUNTING CYCLE (Chapter 4) Assets 5 Liabilities 1 Shareholders Equity Assets 5 Liabilities 1 Common Shares 1 Retained Earnings Dr. 1 Cr. 2 Dr. 2 Cr. 1 Dr. 2 Cr. 1 Dr. 2 Cr. 1 Revenues 2 Expenses 2 Dividends Dr. 2 Cr. 1 Dr. 1 Cr. 2 Dr. 1 Cr. 2 BASIC ACCOUNTING EQUATION (Chapter 3) 7 Prepare financial statements: Statement of earnings Statement of retained earnings Balance sheet 5 Journalize and post adjusting entries: Prepayments/Accruals 6 Prepare an adjusted trial balance 4 Prepare a trial balance 3 Post to general ledger accounts 2 Journalize the transactions 1 Analyze business transactions 9 Prepare a post-closing trial balance 8 Journalize and post closing entries 1 Process 1. To close revenue accounts: Debit each individual revenue account for its balance and credit Income Summary for total revenues. 2. To close expense accounts: Debit Income Summary for total expenses and credit each individual expense account for its balance (assuming normal balances). 3. To close income summary: Debit Income Summary for the balance in the account (or credit if a net loss) and credit (debit) Retained Earnings. 4. To close dividends: Is the balance in the Income Summary account, before transfer to the Retained Earnings account, equal to the net income (loss) reported in the statement of earnings? Debit Retained Earnings and credit Dividends for the balance in the account. STOP AND CHECK: Is the balance in the Income Summary account, before transfer to the Retained Earnings account, equal to the net income (loss) reported in the statement of earnings?...
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