ch03 - CHAPTER 3 Adjusting the Accounts STUDY OBJECTIVES 1....

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CHAPTER 3 Adjusting the Accounts STUDY OBJECTIVES 1. EXPLAIN THE TIME PERIOD ASSUMPTION. 2. EXPLAIN THE ACCRUAL BASIS OF ACCOUNTING. 3. EXPLAIN WHY ADJUSTING ENTRIES ARE NEEDED. 4. IDENTIFY THE MAJOR TYPES OF ADJUSTING ENTRIES. 5. PREPARE ADJUSTING ENTRIES FOR PRE- PAYMENTS. 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. 3-1
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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 re- ceived 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 account- ing 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. b. The revenue recognition and matching principles to be followed. 8. (S.O. 4) Adjusting entries are required every time financial statements are prepared. Adjust- ing entries can be classified as (a) prepayments (prepaid expenses or unearned revenue) or (b) accruals (accrued revenues or accrued expenses). Prepayments
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ch03 - CHAPTER 3 Adjusting the Accounts STUDY OBJECTIVES 1....

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