Chapter 3_Lecture_Summer_2010

Chapter 3_Lecture_Summer_2010 - 1 Explain the time period...

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Unformatted text preview: 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. Chapter 3 Study Objectives Chapter 3 Study Objectives Generally a month , a quarter , or a year . Fiscal year vs. calendar year The accounting period of one year in length is known as a fiscal year . Time Period Assumption Time Period Assumption Accountants divide the economic life of a business into artificial time periods (also known as Periodicity Assumption ). Jan. Feb. Mar. Apr. Dec. . . . . . The accounting period used by most businesses coincides with the calendar year (January 1 to December 31) All listed companies regulated by the SEC must file quarterly reports (form 10-Q and annual reports (Form 10-K) The fiscal year of Macy’s Inc. ends on the Saturday closest to January 31 st . Fiscal year 2007 started on February 4, 2007 and ended on February 3, 2008. Time Period Assumption Time Period Assumption Transactions recorded in the periods in which the events occur Revenues are recognized when earned, rather than when cash is received. Expenses are recognized when incurred, rather than when paid. Timing Issues: Accrual-Based Accounting Timing Issues: Accrual-Based Accounting Revenues are recognized when cash is received. Expenses are recognized when cash is paid. Cash-basis accounting is not in accordance with generally accepted accounting principles (GAAP). Timing Issues: Cash-Basis Accounting Timing Issues: Cash-Basis Accounting Revenue Recognition Principle Revenue Recognition Principle Companies recognize revenue in the accounting period in which it is earned and measurable . In a service enterprise, revenue is considered to be earned at the time the service is performed. For a retailer or manufacturer, revenue is earned when the goods are delivered. Matching Principle Matching Principle Match expenses with revenues in the period when the company makes efforts to generate those revenues. “Let the expenses follow the revenues.” The practice of expense recognition is referred to as the matching principle Adjusting Entries are made in order for: Adjusting Entries are made in order for: • Revenues Revenues to be recorded in the period in which they are to be recorded in the period in which they are earned earned. • Expenses Expenses to be recognized in the period in which they are to be recognized in the period in which they are incurred incurred. To ensure that the To ensure that the revenue recognition revenue recognition and and matching principles matching principles are followed....
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This note was uploaded on 02/08/2011 for the course ACCOUNTING 272 taught by Professor Stein during the Spring '11 term at Rutgers.

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Chapter 3_Lecture_Summer_2010 - 1 Explain the time period...

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