Q4 VOCAB

• 8 Accounting Cycle

  • Transactions
  • Journal Entries
  • Posting
  • Trial balance
  • Closing the books
  • Financial statements
  • Adjusting journal entries
  • Worksheet
• Adjusting journal entries


  Made to update the accounts and bring them to their correct balances
• Concept of adjusting journal entries

  An application of the accrual concept of accounting and the matching principle
• Accrual concept


  States that income is recognized when earned regardless of when collected and expense is recognized when incurred regardless of when paid
• Matching principle


  Aims to align expenses with revenues and expenses should be recognized in the period when the revenues generated by such expenses are recognized
• Purpose of adjusting journal entries

  Main purpose is to update the accounts to conform to the accrual concept
• Composition of adjusting journal entries

  Affect at least one nominal account and one real account
• Nominal account


  An account whose balance is measured from period to period and includes all accounts in the Income Statement, plus owner's withdrawal
• Nominal account examples


  • Service Revenue
  • Salaries Expense
  • Rent Expense
  • Utilities Expense
  • Mr. Gray Drawing
• Real account


  Has a balance that is measured cumulatively, rather than from period to period. Real accounts include all accounts in the balance sheet
• Real account examples


  • Cash
  • Accounts Receivable
  • Rent Receivable
  • Accounts Payable
  • Mr. Gray Capital
• All adjusting entries include at least a nominal account and a real account
• 4 types of adjusting entries

  • Accrued Income/Accrued Revenue
  • Accrued Expense
  • Deferred Income (Unearned revenue/unearned income or deferred revenue/deferred income)
  • Prepaid Expense (prepayments)
• Accrued Income/Accrued Revenue


  Income already earned but has not yet been collected
• Appropriate receivable accounts in Accrued Income/Accrued Revenue

  • Accounts Receivable
  • Rent Receivable
  • Interest Receivable
• Income accounts in Accrued Income/Accrued Revenue

  • Service Revenue
  • Rent Income
  • Interest Income
• Accrued Expense


  Expenses that are already incurred but have not yet been paid
• Appropriate expense accounts in Accrued Expense

  • Utilities Expense
  • Rent Expense
  • Interest Expense
• Appropriate liability accounts in Accrued Expense

  • Utilities Payable
  • Rent Payable
  • Interest Payable
  • Accounts Payable
• Deferred Income (Unearned revenue/unearned income or deferred revenue/deferred income)


  Represents revenue already collected but not yet earned
• Unearned revenues are considered liabilities since these are advance payments from your customers wherein services are not yet rendered
• 2 ways of recording unearned revenue

  • Liability method
  • Income method
• Prepaid Expense (prepayments)


  Represent payments made for expenses which have not yet been incurred
• Depreciation


  When a fixed asset is acquired by a company, it is recorded at cost and this cost is recognized as an asset and not an expense. The cost is to be allocated as expense to the periods in which the asset is used
• 2 types of depreciation

  • Physical depreciation
  • Functional depreciation/economic depreciation
• Straight-line depreciation method

  • most common and simplest where the cost of the fixed asset is distributed evenly over the life of the asset
• Doubtful Accounts or Bad Debts, and other allowances


  Companies provide services or sell goods for cash or on credit. Businesses that allow credit are faced with the risk that their receivables may not be collected
• Net realizable value for accounts receivable

  Computed as Accounts Receivable (Gross Amount) less Allowance for Bad Debts
• Allowance for Bad Debts (also often called Allowance for Doubtful Accounts)


  Uncollectible portion of the entire Accounts Receivable that the company will not be able to collect
• Bad Debts Expense or Doubtful Accounts Expense


  Uncollectible amount for credit sales/revenues made during the period
• Preparation of financial statements (Easy steps in preparing a worksheet)

  1. Prepare a trial balance on the worksheet

  2. Enter the adjustments in the adjustment columns

  3. Enter adjusted balances in the adjusted trial balance columns

  4. Extend adjusted trial balance amounts to appropriate financial statements columns

  5. Total the statement columns, compute net income (or loss), and complete the worksheet
• Types of financial statements

  • Income statement or Profit and Loss Statement
  • Statement of Changes in Equity
  • Balance Sheet or Statement of Financial Position
  • Statement of Cash Flows
  • Notes to Financial Statements
• Preparation of closing entries

  1. Preparing closing entries in the general journal

  2. Posting the closing entries in the general ledger

  3. Creating Post-closing Trial balance
• Closing entry


  A journal entry made at the end of an accounting period to transfer the temporary account balances to the permanent accounts
• Purpose of closing entry

  To reduce the balances of the temporary accounts to zero from the general ledger, and prepare the permanent accounts for another accounting period
• Importance of closing entry

  By making closing entries, all nominal or temporary accounts are closed out to the owner's capital account, through the income summary account
• Income Summary


  A summary account used to close the income and expense accounts. And then, the net income amount shall be transferred to the equity accounts of the owner
• Merchandising business


  A business engaged in a buying and selling of goods or products
• What describes a merchandising business

  "Trading" and "retailing"
• Merchandise


  The primary product of this business is the "merchandise" items it sells