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V ? A contract to perform future services for a customer is p
 
 on the balance
sheet of the company that will be providing the servic es
2 ? An account is a record in the general ledger that is used to collect and store debit and
credit amounts For example, a company will have a Cash account in which every
transaction involving cash is recorded If the company sells merchandise for cash, t he
Cash account will be debited and the Sales account will be credited
3 ? A T-account is an uppercase or capital T that is used by accountants to visualize a
general ledger account The account title is written on the top portion of the T Debit
balances and debit entry amounts are shown on the left side of the T Credit balances
and credit entry amounts are shown on the right side

4 ?
o Some transactions affect only balance sheet accounts For example, when a
company pays a supplier for goods previously purch ased with terms of net 30 days, the
payment will be recorded as a debit to the liability account Accounts Payable and as a
credit to the asset account Cash (
o revenue account or expense account is involved 

Another example of a transaction affecting two balance sheet accounts and no income
statement account is a deposit for future services The payer will debit the asset Prepaid
Expenses and will credit the asset Cash The company receiving the payment will debit
Cash and will credit a liability account such as Customer Deposits, Unearned Revenues,
or Deferred Revenues

Adjusting entries are a classification of accounting entries that will affect a balance sheet
account and an income statement account

5 ? A balance sheet presents the amounts of a company͛s assets, liabilities, and owner͛s
equity as of an instant or moment in time within a da y Usually it is the instant as of the
end of the day In other words, you can have a balance sheet each day, but the balance
sheet amounts represent the amount at the instant or moment after all of the
transactions of the specified day have been recorded
 If you do prepare a balance sheet as of the end of each day, you will need to make daily
adjusting entries in order for the balance sheet to be meaningful For example, each day
more electricity is used and therefore each day there is an additional liabil ity and an
expense for electricity
6 ? Sales discounts are not reported as an expense Rather, sales discounts are reported as a
reduction of gross sales In other words, Sales or Gross Sales minus Sales Discounts and
Sales Returns and Sales Allowances =
et Sales

7 ? Under the accrual basis of accounting, revenues are reported on the income statement
when they are earned (Under the cash basis of accounting, revenues are reported on
the income statement when the cash is received  Under the accrual basis of acco unting,
expenses are matched with the related revenues and/or are reported when the expense
occurs, not when the cash is paid The result of accrual accounting is an income
statement that better measures the profitability of a company during a specific tim e
period

For example, if I begin an accounting service in December 2005 and provide =
V0,000 of
accounting services in December, but don͛t receive any of the money from the clients
until January 2006, there will be a difference in the income statements fo r December
and January under the accrual and cash bases of accounting Under the accrual basis, my
income statements will show =
V0,000 of revenues in December and none of those
services will be reported as revenues in January Under the cash basis, my Dec ember
income statement will show no revenues Instead, the December services will be
reported as January revenues under the cash method

There will be a difference on the balance sheet, too Under the accrual basis, the
December balance sheet will report a ccounts receivable of =
V0,000 and the estimated
true profit will be added to owner͛s equity or retained earnings Under the cash basis,
the =
V0,000 of accounts receivable will not be reported as an asset, and the true profit
will not be included in owner ͛s equity or retained earnings

To illustrate a difference in expenses, we will assume that the heat and light expense
that I used in my accounting service is metered by the utility on the last day of the
month The utilities that I used in December will a ppear on a bill that I receive in January
and will pay on February V Under the accrual basis of accounting, the utilities that I used
in December will be estimated and will be reported as an expense and a liability on the
December financial statements Under the cash basis of accounting, the utilities used in
December will be recorded as an expense on February V, when the utility bills are paid

For financial statements prepared in accordance with generally accepted accounting

principles, the accrual method is required because of the matching principle

8 ? The accounting cycle is often described as a process that includes the following steps:
identifying, collecting and analyzing documents and transactions, recording the
transactions in journals, posting the j ournalized amounts to accounts in the general and
subsidiary ledgers, preparing an unadjusted trial balance, perhaps preparing a
 worksheet, determining and recording adjusting entries, preparing an adjusted trial
balance, preparing the financial statements, recording and posting closing entries,
preparing a post-closing trial balance, and perhaps recording reversing entries

9 ? Generally, the purchases of merchandise are sold in the year they are acquired Hence, it
is logical to match the current period͛s pur chases as expenses on the same income
statement that reports the current period͛s sales revenues

If some of the purchases are not sold in the same period, there will be a change in
inventory An increase in the amount of inventory will appear on the incom e statement
as a deduction to the current period͛s purchases It is a deduction because some of the
costs of the current period͛s purchases are not associated with the sales shown on the
income statement The deduction is reporting that some of the costs o f purchases are
being deferred to a later period when they will be sold The deduction is necessary in
order to achieve the matching principle: matching the proper amount of the costs of the
goods sold with the sales revenues of the accounting period

A decrease in the amount of inventory will appear on the income statement as an

addition to the cost of the purchases This recognizes that some of the sales included
some costs of purchases that were made in an earlier accounting period

V0 ?An expense will decrease the amount of assets or increase the amount of liabilities, ÷

will reduce the amount of owner͛s or stockholders͛ equity
VV ?Reversing entries are made of the first day of an accounting period in order to remove
certain adjusting entries made in the prev ious accounting period Reversing entries are
used in order to avoid the double counting of revenues or expenses and to allow for the
efficient processing of documents Reversing entries are most often used with accrual -
type adjusting entries

V2 ?Depreciation on the income statement is the amount of depreciation expense that is

appropriate for the period of time indicated in the heading of the income statement
The depreciation reported on the balance sheet is the accumulated or the cumulative
total amount of depreciation that has been reported as expense on the income
statement from the time the assets were acquired until the date of the balance sheet

Let͛s illustrate the difference with an example A company has only one depreciable
asset that was acquired three years ago at a cost of =
V20,000 The asset is expected to
have a useful life of V0 years and no salvage value The company uses straight-line
depreciation on its monthly financial statements In t he asset͛s 36th month of service,
the monthly income statement will report depreciation expense of =
V,000 On the
balance sheet dated as of the last day of the 36th month, accumulated depreciation will
be reported as =
36,000 In the 37th month, the incom e statement will report =
V,000
of depreciation expense At the end of the 37th month, the balance sheet will report
accumulated depreciation of =
37,000
V3 ?Revenues received in advance are reported as a current liability if they will be earned
within one year The accounting entry is a debit to the asset Cash for the amount
received and a credit to the liability account such as Customer Advances or Unearned
Revenues

As the amount received in advance is earned, the current liability account will be
debited for the amount earned and the Revenues account reported on the income
statement will be credited This is done through an adjusting entry

V4 ?Unearned income or unearned revenue occurs when a company receives money before
the money is earned This is also referred to as deferred revenues or customer deposits
The unearned amount is recorded in a liability account such as Unearned Revenues,
Deferred Revenues, or Customer Deposits After the amount has been earned, the
liability account is reduced and a revenue a ccount is increased