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Unformatted text preview: Chapter 3 A DJUSTING THE ACCOUNTS CHAPTER STUDY OBJECTIVES After studying this chapter, you should be able to: 1. Explain the time period assumption. 2. Explain the accrual basis of accounting. 3. Explain the reasons for adjusting entries. 4. Identify the major types of adjusting entries. 5. Prepare adjusting entries for deferrals. 6. Prepare adjusting entries for accruals. 7. Describe the nature and purpose of an adjusted trial balance. *8. Prepare adjusting entries for the alternative treatment of prepayments. *Note: All asterisked (*) items relate to material contained in the Appendix to the chapter. The Navigator PREVIEW OF CHAPTER 3 In Chapter 2 we examined the recording process through the preparation of the trial balance. Before we will be ready to prepare financial statements from the trial balance, additional steps need to be taken. Before financial statements can be prepared, questions relating to the recognition of revenues and expenses must be answered. With the answers in hand, the relevant account balances can then be adjusted. The organization and content of the chapter are as follows: The Navigator The Navigator Scan Study Objectives Read Preview Read Chapter Review Work Demonstration Problem Answer True-False Statements Answer Multiple-Choice Questions Match Terms and Definitions Solve Exercises 3-2 Student Study Guide for Accounting Principles, 8th Edition _____________________________________________________________________________ CHAPTER REVIEW Time-Period Assumption 1. (S.O. 1) The time period (or periodicity) assumption assumes that the economic life of a business can be divided into artificial time periods. 2. Accounting time periods are generally a month, a quarter, or a year. The accounting time period of one year in length is usually known as a fiscal year. Accrual Basis of Accounting 3. (S.O. 2) The revenue recognition and matching principles are used under the accrual basis of accounting. Under cash basis accounting, revenue is recorded only when cash is received and expenses are recorded only when paid. 4. Generally accepted accounting principles require accrual basis accounting rather than cash basis accounting because the cash basis of accounting often leads to misleading financial statements. Revenue Recognition Principle 5. The revenue recognition principle states that revenue should be recognized in the accounting period in which it is earned. The Matching Principle 6. The matching principle dictates that efforts (expenses) be matched with accomplishments (revenues). Adjusting Entries 7. (S.O. 3) Adjusting entries are made in order for: a. Revenues to be recorded in the period in which they are earned, and for expenses to be recognized in the period in which they are incurred....
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This note was uploaded on 11/09/2009 for the course FINANCE 330 taught by Professor Seri during the Spring '09 term at Birzeit University.
- Spring '09