Accounting PPt ch3.pptVIP

Chapter 3 Adjusting the Accounts Study Objectives Time period assumption Accrual basis of accounting Why adjusting entries are necessary Major types of adjusting entries Adjusting entries for prepayments Adjusting entries for accrual Purpose of an adjusted trial balance Time Period Assumption The time period assumption assumes that the economic life of a business can be divided into artificial time periods. Accounting time periods are generally a month, a quarter, or a year (fiscal year). A fiscal year is not always a calendar year ending on December 31. (e. g. Companies experiencing seasonal variations in sales often choose a fiscal year corresponding to their natural business year.) The Accounting Period Accrual Vs. Cash-basis Accounting Revenue Recognition Principle The revenue recognition principle dictates that revenue be recognized in the accounting period in which it is earned. In a service business, revenue is considered to be earned when the service is performed. Matching Principle The practice of expense recognition is referred to as the matching principle. The matching principle dictates that efforts (expenses) be matched with accomplishments (revenues). GAAP Relationships in Revenue and Expense Recognition Why Adjusting Entries are Necessary Adjusting entries are needed to ensure that revenue recognition and matching principles are followed Revenues are recorded in the period earned, and...... Expenses are recognized in the period incurred. Adjusting Entries for Prepayments Adjusting entries for prepaid expenses are required to record the portion of the expense incurred in the current period. The adjusting entry results in a debit to an expense account and a credit to an asset account. Adjusting entries for unearned revenues are required to record the portion of the revenue earned in the current period. The adjusting entry results in a debit to a liability account and a credit to a revenue account. Adjusting Entries for Prepaid Expense: Insurance On