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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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