BUS FPX 2061 Assessment 3 Completing the Accounting Cycle

BUS FPX 2061 Assessment 3 Completing the Accounting Cycle

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Capella University

BUS-FPX2061 Accounting Fundamentals

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Date

Assessment 3: Completing the Accounting Cycle

1. How are revenues and expenses reported on the income statement under the cash basis of accounting? How are they reported on the accrual basis of accounting? What are the key differences between these two methods? In what situations would you use one of these approaches versus the other?

Under the cash basis of accounting, revenues are recognized when cash is received, and expenses are recorded when cash is paid out. This means that transactions are only recorded when there is an actual cash flow. In contrast, under the accrual basis of accounting, revenues are recognized when sales occur or when services are performed, regardless of when cash is received. Similarly, expenses are recognized when they are incurred, not when they are paid.

The primary difference between the two methods is the timing of recognition. The cash basis records only when cash changes hands, while the accrual basis records when a transaction occurs, regardless of cash movement. The cash basis is generally used by small businesses or individuals due to its simplicity, whereas the accrual basis is theoretically and professionally preferred and used by most businesses because it provides a more accurate financial picture. In rare cases, very small operations may use the cash basis for convenience, but most organizations rely on the accrual basis for financial reporting consistency and compliance.

2. Which events during an accounting period trigger the recording of normal journal entries? Which event triggers the making of adjusting entries? Please explain why adjusting entries are necessary at the end of an accounting period. What ethical considerations are there when making adjusting entries?

Normal journal entries are recorded whenever a routine financial transaction occurs during an accounting period. Examples include sales, purchases, payments, and receipts. These transactions directly affect the company’s accounts and are part of day-to-day business operations.

Adjusting entries are triggered at the end of the accounting period. Their purpose is to ensure that revenues and expenses are recognized in the appropriate period, aligning with the matching principle. These entries correct or update account balances for accrued or deferred items that may not have been recorded through normal journal entries.

Adjusting entries are essential because they help present an accurate financial picture by ensuring that all income and expenses are reported in the correct accounting period. From an ethical standpoint, accountants must ensure that these adjustments are made accurately and honestly. Manipulating adjusting entries to distort financial results would violate ethical standards and mislead stakeholders.

3. Give an example of an adjusting journal entry for each of the following transactions.

The following table presents examples of adjusting journal entries for common accounting situations:

Transaction Type	Example Situation	Adjusting Journal Entry
Equal growth of an expense and a liability	Payroll period ends before the accounting period ends.	Debit Payroll Expense and credit Salaries Payable.
Earning of revenue previously recorded as unearned revenue	Customer prepaid for a product or service not yet delivered.	Debit Unearned Revenue and credit Revenue for the portion earned.
Equal growth of an asset and revenue	Product sold but payment due next period.	Debit Accounts Receivable and credit Revenue.
Increase in an expense and decrease in an asset	Prepaid insurance needs adjustment at period end.	Debit Insurance Expense and credit Prepaid Insurance.

These entries ensure accurate matching of revenues and expenses within the same accounting period.

4. The balance in the equipment account is $4,689,000, and the balance in the accumulated depreciation equipment account is $949,000. What is the book value of the equipment and does that amount mean that the equipment has a loss in real value of $949,000? Explain your response.

The book value of the equipment is calculated as:

Account	Amount ($)
Equipment (Cost)	4,689,000
Less: Accumulated Depreciation	(949,000)
Book Value	3,740,000

The depreciation amount does not represent a real loss in market value. Instead, it is an accounting method used to allocate the cost of the equipment over its useful life. The rate of depreciation depends on the estimated period of use. For instance, if the company expects to use the equipment for four years, the annual depreciation expense will be higher than if it were used for ten years. Therefore, the $949,000 reflects allocated cost, not a real loss in value.

5. After the Adjusted Trial Balance columns of a worksheet have been totaled, which account balances are extended to the Income Statement columns, the Statement of Retained Earnings columns, and the Balance Sheet columns?

Each financial statement receives information from specific accounts, as shown below:

Financial Statement	Accounts Extended From Adjusted Trial Balance	Purpose
Income Statement	Revenue and Expense Accounts	Shows company’s income and performance for the period.
Statement of Retained Earnings	Retained Earnings and Dividends Accounts	Reflects stockholders’ equity and distribution of profits.
Balance Sheet	Asset, Liability, and Capital Stock Accounts	Presents the company’s financial position at period end.

Each of these sections provides critical insights into the company’s profitability, retained equity, and financial stability.

6. Current assets and current liabilities for a company are:

• Current assets: 2020—$387,000; 2021—$435,000

• Current liabilities: 2020—$275,000; 2021—$297,500

Determine the current ratio for 2020 and 2021. Does the change in the current ratio from 2020 to 2021 indicate a favorable or unfavorable trend? Explain your response.

The current ratio is calculated using the formula:

[
text{Current Ratio} = frac{text{Current Assets}}{text{Current Liabilities}}
]

Year	Current Assets ($)	Current Liabilities ($)	Current Ratio (A/L)
2020	387,000	275,000	1.41
2021	435,000	297,500	1.46

The increase in the current ratio from 1.41 to 1.46 indicates a favorable trend, suggesting that the company’s liquidity has improved. Assets grew by approximately 12%, while liabilities grew by 8%, showing the business is in a slightly stronger financial position in 2021.

7. Rearrange the following steps in the accounting cycle in proper order.

The correct sequence of steps in the accounting cycle is as follows:

Step No.	Process
1	Transactions are analyzed and recorded in the general journal.
2	Transactions are posted to the ledger.
3	An unadjusted trial balance is prepared.
4	An optional end-of-period worksheet is prepared.
5	Financial statements are prepared.
6	Adjustment data are assembled and analyzed.
7	Adjusting entries are journalized.
8	An adjusted trial balance is prepared.
9	Closing entries are journalized and posted to the ledger.
10	A post-closing trial balance is prepared.

This sequence ensures a systematic flow of accounting data from transaction recording to financial reporting, maintaining accuracy and compliance throughout the cycle.

References

Kimmel, P. D., Weygandt, J. J., & Kieso, D. E. (2022). Accounting: Tools for Business Decision Making (9th ed.). Wiley.

Horngren, C. T., Harrison, W. T., & Oliver, M. S. (2021). Financial Accounting (13th ed.). Pearson.

BUS FPX 2061 Assessment 3 Completing the Accounting Cycle

Libby, R., Libby, P. A., & Hodge, F. (2020). Financial Accounting (10th ed.). McGraw-Hill Education.