Ch3 - Chapter 3 - The adjusting process CHAPTER OVERVIEW...

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Chapter 3 - The adjusting process CHAPTER OVERVIEW Chapter 3 extends the discussion begun in Chapter 2 concerning the recording of business transactions using debit and credit analysis. Therefore you should feel comfortable with the debit and credit rules when you begin. The learning objectives for this chapter are to: 1. Distinguish accrual-basis accounting from cash-basis accounting. 2. Make adjusting entries at the end of the accounting period. 3. Prepare an adjusted trial balance. 4. Prepare the financial statements from the adjusted trial balance. Appendix: Alternate treatment of prepaid expenses and unearned revenue. CHAPTER REVIEW Objective 1 - Distinguish accrual-basis accounting from cash-basis accounting. In cash-basis accounting , transactions are recorded only when cash is received or paid. In accrual- basis accounting , a business records revenues as they are earned and expenses as they are incurred, without regard to when cash changes hands. Revenues are considered earned when services have been performed or inventory is sold because the provider has a legal right to receive payment. Expenses are considered incurred when goods or services have been used. GAAP requires that businesses use the accrual basis so that financial statements will not be misleading. Financial statements would understate revenue if they did not include all revenues earned during the accounting period and would understate expenses if they did not include all expenses incurred during the accounting period. Accountants prepare financial statements at specific intervals called accounting periods. The basic interval is a year, and nearly all businesses prepare annual financial statements. Usually, however, businesses need financial statements more frequently, at quarterly or monthly intervals. Statements prepared at intervals other than the one year interval are called interim statements . Whether financial statements are prepared on an annual basis or on an interim basis, they are prepared at specific time intervals. The cutoff date is the last day of the time interval for which financial statements are prepared. All transactions that occur up to the cutoff date should be included in the accounts. Thus, if financial statements are prepared for January, all transactions occurring on or before January 31 should be recorded. The revenue principle guides the accountant on 1) when to record revenue and 2) the amount of revenue to record. Revenue is recorded when it is earned - that is, when a business has delivered a completed good or service. The amount of revenue to record is generally the cash value of the goods delivered or the services performed. The matching principle guides the accountant on recording expenses. The objectives of the matching principle are 1) to identify the expenses that have been incurred in an accounting period; 2) to measure the expenses and 3) to match them against revenues earned during the same period. There is a natural association between revenues and some types of expenses. If a business pays its
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Ch3 - Chapter 3 - The adjusting process CHAPTER OVERVIEW...

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