Chapter 4 Lecture

Chapter 4 Lecture - CHAPTER 4 CLASS NOTES ACCRUAL...

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Unformatted text preview: CHAPTER 4 CLASS NOTES ACCRUAL ACCOUNTING AND FINANCIAL STATEMENTS In order to ensure that accounting records are complete on an accrual basis, the accountant must make certain adjustments (in the form of journal entries called adjusting entries ) for items that have not been recorded as yet or costs that need to be matched or allocated . There are four (4) basic types of adjusting entries that will be made at the end of each accounting period after all that periods transactions have been recorded, posted and a trial balance prepared. 1. Prepaid or Deferred Expenses. This arises from cash being paid before the expense is incurred. For example, one may pay rent several months in advance or buy supplies that will last several accounting periods. We record these payments as assets because we did not receive the benefit of these expenditures as yet and have not incurred the expense as yet---they will be for future periods. We debit the asset and credit cash. Each month, the accountant calculates the amount used or the amount still unused and records an adjustment. The adjustment is to record as an expense the amount used and reduce the asset accordingly, which is now the new amount unused. Debit expense and credit asset. Cash paid for plant and equipment is similar to this category in that the asset will be used for several periods and several years. Each period we assume the asset is being used up and there is less cost (value) remaining. We, therefore, based upon a determined estimate of the number of periods to be affected ( that will be benefited) record an expense for the portion used and reduce the asset account accordingly. The unused portion remains as an asset until all of it eventually has been recorded as an expense over time. 2. Deferred Revenue: This occurs when revenue is received in advance of the revenue being earned. It is basically a liability account, as the customer could ask for the monies paid to be returned . It remains a liability until the goods or services sold are delivered to the customer as this is when the revenue is earned. It can be earned all at once if the earning is at a point in time or if a service, it may be earned at so many dollars per month, etc. like the magazine subscription that we have discussed in class. Initially, we record a debit to cash for the amount received and a credit to the liability called deferred revenue. As we earn the revenue, we reduce the liability with a debit and credit the revenue earned. 3. Accrued Expenses: These are expenses that have been incurred as the goods or services have been received by the company, but they have not been paid for as yet. The company is obligated to pay for these items and therefore, there is a liability. The company would record a debit to expense and a credit to a liability. When it is paid, we reduce the liability by recording a debit with a corresponding credit to cash....
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Chapter 4 Lecture - CHAPTER 4 CLASS NOTES ACCRUAL...

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