Chapter 3_Lecture_Summer_2010

Chapter 3_Lecture_Summer_2010 - Chapter 3 Study Objectives...

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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
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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. . . . . .
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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
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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
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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
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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.
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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
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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.
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