Chapter_4 - Chapter 4 Adjustments and Closing If you can...

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Chapter 4 Adjustments and Closing If you can cut pie, you can work adjustments. An adjustment are nothing more then dividing revenue or expense over multiple (usually 2) time periods. Just like serving a pie over two days. Important concepts Timing: Accounting divides time into arbitrary short segments; a month, a quarter, a year. Decisions must be made about what occurs in each time segment. Revenue recognition: revenue is recognized when it is earned. When any of us were 11 or 12 years, old saving up for the first major purchase, we all counted and recounted the cash. If we did work on Monday that we would not be paid for until Friday; in the mid week count of what was available for the major purchase almost everyone counted both the cash and what was owed to them from Monday. We recognized the revenue when it was earned, a perfectly natural thing to do. Matching concept: The matching concept requires expenses to be matched to the revenue they helped earn; therefore; both revenue and expense should be recorded in the period they were earned or incurred. Accrual Accounting: Revenue is recognized when it is earned and expense when they are incurred. Adjusting Entries are required before financial statements are done. Adjustments involve one income statement account and one balance sheet account. Types of Adjustments; Deferred expenses are prepaid (paid in advance), Deferred revenues are collected in advance (unearned revenue). Accrued expenses have occurred but not yet been recorded. Accrued revenues have occurred but not yet been recorded.
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Examples of usual adjustments: Prepaids: If insurance is prepaid on December 1 for $500 and covers a 5 month period, record the adjusting entry on December 31. We are using up the insurance at the rate of $100 per month. By December 31 one fifth or $100 of the Prepaid Insurance has been used up and become an expense. Prepaid Insurance
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This note was uploaded on 02/22/2011 for the course ACCT 2021 taught by Professor Leonard during the Spring '11 term at St. Petersburg College.

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Chapter_4 - Chapter 4 Adjustments and Closing If you can...

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