Time period assumption

Time period assumption - Time period assumption • the...

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Unformatted text preview: Time period assumption • the economic life of a company can be divided into artificial time periods Revenue recognition (accrual concepts) • Revenue is recognized in the period which it is earned • i.e. when the service is performed Expense recognition (follows revenue) • Use matching principle • i.e. the period in which effort is expended to generate revenues Accrual accounting vs. Cash basis accounting • Accrual system transactions are recorded in the period in which events occur • Cash basis system records transactions when cash is either received or paid • Cash method is not in accordance with GAAP Adjusting entries • Adjusting entries make it possible to report correct amounts on the balance sheet and on the income statement . • A company must make adjusting entries every time it prepares financial statements. • Every adjusting entry will include one income statement account and one balance sheet account. • Adjusting entries- needed to ensure that the revenue recognition and matching principles are followed. • 4 types of adjusting entries • Deferrals • Prepaid expenses- Expenses paid in cash and recorded as assets before they are used or consumed. (decrease asset, increase expense) • Unearned revenues- Cash received and recorded as liabilities before revenue is earned. (decrease liability, increase revenue) • Accruals • Accrued revenues- Revenues earned but not yet received in cash or recorded. (increase assets, increase revenue) • Accrued expenses- Expenses incurred but not yet paid in cash or recorded. (increase expense, increase liability) • Know how to adjust all 4 above (ex. Slides 27, 27, 35, 42, 48) • Accounting Cycle (slide 63) adjusted t rial balance is basis for preparation of financial...
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Time period assumption - Time period assumption • the...

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