accounting_chapter4notes

accounting_chapter4notes - C hapte r 4 Completing the...

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Chapter 4: Completing the Accounting Cycle Adjusting Revenues and Expenses Accounting cycle – the process in which businesses analyze, record, and post the effects of transactions; adjust the records at the end of the period; prepare the financial statements; and then prepare the accounting records for the next accounting cycle Reasons for Adjustments Cash is not always received in the period in which the company earns the related revenue; likewise, cash is not always paid in the period in which the company incurs the related expense. Record adjusting entries at the end of every accounting period so that: o Revenues are recorded when they are earned (the revenue principle ). o Expenses are recorded when they are incurred to generate revenue (the matching principle ) . o Assets are reported at amounts that represent the probable future benefits remaining at the end of the period. o Liabilities are reported at amounts that represent the probable future sacrifices of assets or services owed at the end of the period. During the Period: Analyze transactions Record journal entries in the general journal Post amounts to the general ledger At the End of the Period: Adjust revenues and expenses and related balance sheet accounts Prepare a complete set of financial statements and disseminate the statements to users Close revenues, gains, expenses, losses, and withdrawals to owner’s equity Types of Adjustments Page | 1
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There are four types of adjustments: Revenues o Unearned Revenues – previously recorded liabilities that were created when cash was received in advance and that must be adjusted for the amount of revenue actually earned during the period. o Accrued Revenues – revenues that were earned but not yet recorded, with cash to be received in future periods. Expenses o Prepaid Expenses – previously recorded assets (such as Prepaid Rent, Supplies, and Equipment) that were created when cash was paid in advance and that must be adjusted for the amount of expense actually incurred during the period through use of the asset. o Accrued Expenses – expenses that were incurred but not yet recorded, with cash to be paid in future periods. Each of these types of adjustments involves two entries: One for the cash receipt or payment. One for recording the revenue Analysis of Adjustments 1. Identify the type of adjustment 2. Determine the amount of revenue earned or expense incurred during the period.
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