9 - Alston Air Purification System Unadjusted Trial Balance...

Alston Air Purification System
Unadjusted Trial Balance
December 31, 2016
Balance
Account Title Debit Credit
Cash $7,400
Accounts Receivable 19,900
Prepaid Rent 3,000
Office Supplies 1,200
Equipment 21,000
Accumulated Depreciation—
Equipment
$4,000
Accounts Payable 3,400
Salaries Payable
Unearned Revenue 2,500
Common Stock 40,900
Dividends 9,000
Service Revenue 15,600
Salaries Expense 3,500
Rent Expense
Depreciation Expense—Equipment
Advertising Expense 1,400
Supplies Expense
Total
$ 66,400 $ 66,400

Accrual basis accounting records the effect of each transaction as it
occurslong dash
that
is, revenues are recorded when earned and expenses are recorded when incurred. Most businesses use the accrual
basis over the
cash basis .
The accrual basis of accounting provides a better picture of a business's revenues and expenses. It records revenue
only when it has been earned and expenses only when they have occurred. Under accrual basis accounting, it is
irrelevant when cash is received or paid.
The timing and recognition of revenues and expenses is the key difference between the cash basis and accrual basis
method of accounting. This difference can be explained by understanding the time period concept and the revenue
recognition and matching principles.
Time period concept:
The time period concept assumes that a business's activities can be sliced into small segments and that financial
statements can be prepared for specific periods, such as a month, quarter, or year.
Revenue recognition principle:
The revenue recognition principle tells accountants the following things: (1)
when
to record
revenuelong dash
that
is, when to make a journal entry for a revenue, and (2) the
amount
of revenue to record.
Matching principle:
The matching principle guides accounting for expenses and ensures that all expenses are recorded when they are
incurred during the period, and matches those expenses against the revenues of the period.
The end-of-period process begins with the unadjusted trial balance. The unadjusted trial balance amounts, however,
are incomplete because they omit various revenue and expense transactions. Accrual basis accounting requires the
business to review the unadjusted trial balance and determine if any additional revenues and expenses need to be
recorded. Are there revenues that the company has earned that haven't been recorded yet? Are there expenses that
have occurred that haven't been journalized?
An adjusting entry is completed at the end of the accounting period and records revenues to the period in which they
are earned and expenses to the period in which they occur. Adjusting entries also update the asset and liability
accounts. Adjustments are needed to properly measure two things:
1. Net income (loss) on the income statement
2. Assets and liabilities on the balance sheet.