Ch 3 The Adjusting Process partially filled in.doc

Ch 3 The Adjusting Process partially filled in.doc -...

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Adjusting Entries The revenue recognition principle tells us when to record revenue and how much to record. Accrual accounting requires that we record revenues when earned and expenses when incurred Revenue is recognized when 1. It is earned AND 2. Realized. The matching principles says expenses must be matched through a direct cause-and- effect relationship or they may be allocated in a systematic way. Recognize = record a journal entry Realized = received the cash or the right to receive the cash (which you believe you will collect.) The cash basis of accounting records revenues and expenses on a cash received and cash paid basis, used for income tax purposes by some companies. Example 1 We sold $2,000 worth of merchandise on account in July. We sent a bill in August and the customer paid the bill in September. When do we recognize the revenue? 1
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Example 2 We use electricity in December, receive the bill in January and pay the bill in February. When will record this transaction? Adjusting the books is a step in the accounting process done at the end of each accounting period (usually the end of a year) to bring all accounts up to date that have not been brought up to date from the regular day to day journal entries.
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