Accounting 201 Rephrase 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.