Chapter_3 - The Matching Concept and the Adjusting Process...

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Unformatted text preview: The Matching Concept and the Adjusting Process Chapter 3 1 Bases of Accounting: Refers to when an entity recognizes (i.e., makes a journal entry to reflect) revenues and expenses. Major Bases of Accounting: Cash Basis Accrual Basis 2 Cash Basis of Accounting Revenues are recognized when cash is received, and Expenses are recognized when cash is paid. 3 Accrual Basis of Accounting Revenues are recognized when earned, and Expenses are recognized when incurred. 4 What is the preferred basis (i.e., "GAAP") of accounting? Why? 5 Will a business using the cash basis of accounting have the following accounts it its general ledger? Why or why not? Accounts Receivable, and Accounts Payable 6 Since the Accrual Basis of Accounting is GAAP, we will use this basis for the rest of the course. 7 The Matching Concept The principle that revenues and related expenses are reported in the same accounting period. Essentially, expenses are "matched" with the revenues they generated. Results in an appropriate measurement of net income. The Accrual Basis of Accounting is based on the matching concept. 8 The Adjusting Process The analysis an updating of accounts at the end of the accounting period before the financial statements are prepared is called the adjusting process. 9 Adjusting Entries The journal entries that bring the account balances up to date at the end of the accounting period. Always involve one balance sheet account (asset or liability) and one income statement account (revenue or expense). 10 Basic Adjusting Entries: Prepaid Expenses, Unearned Revenues, Accrued Expenses, Accrued Revenues, and Depreciation Expense. 11 Prepaid Expenses: Items that have initially been recorded as assets, but will become an expense over time or through the normal operation of the business. Examples: Prepaid Insurance Supplies 12 Unearned Revenues: Items that have been initially recoded as a liability, but will become revenue over time or through the normal operation of a business. Example: Unearned Rent 13 Accrued Expenses: Expenses that have been incurred, but not yet recognized. Example: Accrued Wages 14 Accrued Revenues: Revenues that have been earned, but not yet recognized. Example: Unbilled fees or commissions 15 Fixed Assets Property, Plant, and Equipment that are owned by a business and have a long (i.e, greater that one accounting period) or permanent life. Examples: Land Buildings Office Equipment 16 Depreciation Expense Since fixed assets generate revenue and usually "wear out" over time, this decline in usefulness must be recorded over time as an expense (i.e., Depreciation Expense). Journal Entry: Depreciation Expense Accumulated Depreciation 17 ...
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