Completing the Accounting Cycle

Completing the Accounting Cycle - Completing the Accounting...

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1 Completing the Accounting Cycle Two main additional journal entries are needed to complete the accounting cycle: 1) Adjusting journal entries 2) Closing journal entries Before moving on to adjusting journal entries, two important concepts of accrual accounting should be discussed: 1) Revenue recognition principle : Revenues are recorded when the following two criteria are met: - The earnings process is substantially completed - Cash has been collected or collectivity is reasonably assured 2) Matching principle : Expenses are recorded when the assets or costs are incurred (used up) for generating revenue. The above two principles are applied to recognize revenue or expenses in the following: 1. Adjusting journal entries - Why needed? : To report a correct account balance of the current reporting period. Because some transactions affect the current reporting period as well as future reporting periods, we have to adjust accounts only for the current period. - When? End of the reporting period (Ex: If a company’s fiscal period is the same as calendar year and the reporting period is on an annual basis, the end of the reporting period is 12/31/XXXX) - How? Two types - “Prepaid (or Deferred)” and “Accrual” 1) Type 1: “Prepaid (Deferred)” – prepaid expenses and unearned revenue The prepaid (or deferred) type of transactions must be recorded as an original journal entry at the date of cash payment or cash receipt for those cash transactions. a) Prepaid expenses (Assets): Payment made in advance and normally charged to expenses Since prepaid expanses will be used up in generating a firm’s revenue, the prepaid expenses ( asset account ) will be recognized as expenses in the future (based on the matching principle). Ex) On March 1, 2009, Shop Rite paid its insurance agent $3,000 for the premium due on a 24-month corporate policy. Prepare adjusting journal entries at December 31, 2009. >>> First of all, we have to report the cash transaction in an original entry.
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2 Original journal entry 3/1/09 (The date of cash payment) Dr. Prepaid insurance expense (Asset) 3,000 Cr. Cash 3,000 At the end of the period, 12/31/09, we have to recognize correct expenses and adjust the original journal entry item for the current period (2009).
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This note was uploaded on 02/03/2011 for the course MGA 201 taught by Professor Anderson during the Fall '08 term at SUNY Buffalo.

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Completing the Accounting Cycle - Completing the Accounting...

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