ACCT 3110 1st EditionExam # 2 Study Guide Lectures: 1 - 3Differentiate between deferrals and accruals.4 Broad Types of Adjusting Entries1. Prepaid Expenses (deferral)2. Unearned Revenues (deferral)3. Accrued Revenues (accrual)4. Accrued Expenses (accrual)Deferral is when you pay for something in advance- can either be deferred expenses or deferred revenueAccrual is when cash has not yet been exchanged- either incur an expense before cash is paid or earn revenue before cash is received-Salary expense is almost always accruedDifferentiate between temporary (nominal) and permanent (real) accounts.Temporary Accounts- Revenue, expenses, dividendsReal Accounts- Never closed out, assets, liabilities, stockholder’s equityWhat are closing entries and when are they recorded?Closing EntriesClose out temporary accounts to zero so you can start fresh in the new yearOnly make closing entries at the end of the fiscal year to nominal accounts (revenues, expenses, dividends)Dividends are not an expense, but a distribution of wealth. Therefore to close dividends you credit dividends and debit (reduce) retained earningsIn closing revenues and expenses often close to income summary, which is then totaled and closed to retained earningsWant a credit balance in income summary for a gainWhat are reversing entries and when are they recorded?Reversing EntriesSome companies record reversing entries other companies don’t (about 50/50)Reversing entries are recorded on the first day of the new accounting cycleAre the exact opposite of the adjusting journal entryYou can always do reversing entries for accruals but cannot use reversing entries for deferrals where you first debit prepaid expenses or credit unearned revenue (which is about 99% of the time so usually cannot reverse deferrals)Reversing or not reversing will get you to the same placeWhat are the steps in recording a transaction?The Accounting Cycle1. Identify transactions to record2. Reversing entries (at beginning of month)—exact opposite of adjusting entries from previousperiod3. Record in special or general journal4. Posting- Take total of general journal and post to general and subsidiary ledgersa. Post to general ledger weekly or monthlyb. Post to subsidiary ledger daily5. Prepare unadjusted general ledger trial balance- debits should equal credits6. Record adjusting entries7. Prepare adjusted trial balance8. Record closing entries at the end of the year (expenses, revenues, dividends)9. Post closing trial balance- Only small companies use cash basis- Cash basis records revenue when cash is received and expenses when cash is paidWhat is depreciable basis and how is it calculated?- Depreciable Basis: The amount you would depreciate over an assets useful lifeo = Original value – Salvage value- Impact on equity is only seen with a revenue, expense, or transaction with owner- An entry with cash and accounts receivable does not affect equityIncreases Equity- Revenue- Capital contributed (common stock purchased)- Owners provide services to the company- Owners pay liabilities on behalf of the companyDecreases Equity- Expenses- Owners’ withdrawal (dividends)What is goodwill and when can it be recorded?Goodwill is a real account- Can only be recorded when a company acquires another company- If you pay more for the company than the net asset