Accounting 201 Rephrase in own words

Chapter 4

1. Give an example that shows that difference between the cash basis and the accrual basis of accounting.
2. Give an example of each of the four major types of adjusting entries.
3. Describe the nature and purpose of the adjusted trial balance.
4. Describe how closing entries are made.
5. List the required steps in the accounting cycle.

Attachment below is student A and student B answers. Please rephrase their answers in own words.

1.The difference between cash and accrual basis of accounting is the timing of when sales and purchases are recorded in the accounts. Cash basis of accounting recognizes revenues when cash is received, and expenses when they are paid. Accrual basis of accounting recognizes revenues when it’s earned, and expenses when they’re billed, regardless of when the money is actually received or paid.

2. Adjusting entries are classified as either deferrals or accruals. Each of these classes has two subcategories.

Deferrals:

-Prepaid expenses: Expenses paid in cash and recorded as assets before they are used.

For example: Insurance

-Unearned revenues: Receipt of cash recorded as a liability before services are performed.

For example: Airline tickets

Accruals:

-Accrued revenues: Revenues for services performed but not yet received in cash or recorded.

For example: Rent

-Accrued expenses: Expenses incurred but not yet paid in cash or recorded.

For example: Salaries

3. The nature of adjusted trial balance is to show the balances of all accounts including those that have been adjusted at the end of the accounting period. The purpose is to prove the equality of debit balances and credit balances in the ledger after all adjustments.

4. The goal of closing entries is to make the posted balance of the retained earnings account match what we reported on the statement of retained earnings. They are made by transferring the balances in temporary accounts to permanent accounts. Closing the revenue and expense accounts, transferring the credit balances in the revenue accounts, and transferring the debit balances in the expense accounts to a clearing account called Income Summary. Closing the income summary and dividends accounts, transferring the balance of the Income summary accounts, and transferring the debit balance of the dividends accounts to the Retained Earnings account.

5.Steps in the accounting cycle: (1) analyze business transaction (2) journalize the transactions (3) post to ledger accounts (4) prepare a trial balance (5) journalize and post adjusting entries (6) prepare an adjusted trial balance (7) prepare financial statements (8) journalize and post closing entries (9) prepare and post closing trial balance.

1.The cash basis of accounting recognizes revenues when cash is received,and expenses when they are paid. So it is more likely to use this method in a small business. Accrual accounting record revenue when a project is complete,rather than when you get paid. This method is more likely to be used in a large business.

2.Accruals:

Accrued revenue occurs when you make a sale and collect payment at a later date. For example: Accrued service revenue.

Accrued expense is one that you incurs but have not paid yet. For example: Salaries.

Deferrals：

Deferred revenue: Deferred,or unearned,revenue occurs when you receive cash up front for services you will provide in the future. For example: Tuition fees.

Deferred expense: Deferred,or prepaid,expense is one for which you paid cash up front at an earlier date but which you have not incurred yet. For example: Rent expense.

3. The adjusted trial balance shows the balances of all accounts,including those that have been adjusted,at the end of the accounting period. The purpose of the adjusted trial balance is to prove the equality of the total debit balances and total credit balances in the ledger after all adjustments.

4.Closing entries are those journal entries made in a manual accounting system at the end of an accounting period to shift the balances in temporary accounts to permanent accounts. Closing the revenue and expense accounts, transferring the credit balances in the revenue accounts, and transferring the debit balances in the expense accounts to a clearing account called Income Summary. Closing the income summary and dividends accounts, transferring the balance of the Income summary accounts, and transferring the debit balance of the dividends accounts to the Retained Earnings account.

5. The Nine steps in the Accounting Cycle

Step 1: Analyze Business Transaction.

Step 2: Journalize Transaction.

Step 3: Posting To Ledger Account.

Step 4: Preparing Trial Balance.

Step 5: Journalize & Post Adjustments.

Step 6: Prepare Adjusted Trial Balance.

Step 7: Prepare Financial Statements.

Step 8: Journalize & Post Closing Entries.

Step 9: Preparing Post-Closing Trial Balance.