Illustration With Reversing Entries The net impact with reversing entries still

Illustration with reversing entries the net impact

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Illustration With Reversing EntriesThe net impact with reversing entries still records the correct amount of salary expense for 20X4 ($2,000 credit and $5,000 debit, produces the correct $3,000 net debit to Salaries Expense). It may seem odd to credit an expense account on January 1, because, by itself, it makes no sense. The credit only makes sense when coupled with the subsequent debit on January 15. Notice from the following diagram that both approaches produce the same final results:
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BY COMPARING THE ACCOUNTS AND AMOUNTS , NOTICE THAT THE SAME END RESULT IS PRODUCED! In practice, reversing entries will simplify the accounting process. For example, on the first payday following the reversing entry, a "normal" journal entry can be made to record the full amount of salaries paid as expense. This eliminates the need to give special consideration to the impact of any prior adjusting entry. Reversing entries would ordinarily be appropriate for those adjusting entries that involve the recording of accrued revenues and expenses; specifically, those that involve future cash flows. Importantly, whether reversing entries are used or not, the same result is achieved! Classified Balance Sheets The balance sheet reveals the assets, liabilities, and equity of a company. In examining a balance sheet, always be mindful that all components listed in a balance sheet are not necessarily at fair value. Some assets are carried at historical cost, and other assets are not reported at all (such as the value of a company's brand name, patents, and other internally developed resources). Nevertheless, careful examination of the balance sheet is essential to analysis of a company's overall financial condition. To facilitate proper analysis, accountants will often divide the balance sheet into categories or classifications. The result is that important groups of accounts can be identified and subtotaled. Such balance sheets are called "classified balance sheets." The asset side of the balance sheet may be divided into as many as five separate sections (when applicable): Current assets; Long-term investments; Property, plant and equipment; Intangible assets; and Other assets. The contents of each category are determined based upon the following general rules: Current Assets include cash and those assets that will be converted into cash or consumed in a relatively short period of time; specifically, those assets that will be converted into cash or consumed within one year or the operating cycle, whichever is longer. The operating cycle for a particular company is the period of time it takes to convert cash back into cash (i.e., purchase inventory, sell the inventory on account, and collect the receivable); this is usually less than one year. In listing assets within the current section, the most liquid assets should be listed first (i.e., cash, short-term investments, and receivables). These are followed with inventories and prepaid expenses. Long-term Investments include land purchased for speculation, funds set aside for a plant expansion program, funds redeemable from insurance policies (e.g., cash
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