ch03 - PREVIEW OF CHAPTER 3 PREVIEW ADJUSTING THE ACCOUNTS...

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PREVIEW OF CHAPTER 3 PREVIEW OF CHAPTER 3 ADJUSTING THE ACCOUNTS The Adjusted Trial Balance and Financial Statements The Basics of Adjusting Entries ¾ ¾ ¾ Types of adjusting entries Adjusting entries for prepayments Adjusting entries for accruals Summary ¾ Preparing the adjusted trial balance Preparing financial statements ¾ ¾ Time Period assumption Fiscal and calendar years Recognizing revenues and expenses Accrual vs. Cash basis accounting ¾ Timing Issues ¾ ¾ ¾
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TIME-PERIOD (or PERIODICITY) ASSUMPTION TIME-PERIOD (or PERIODICITY) ASSUMPTION z Assuming that the economic life of a business can be divided into artificial time periods. z Accounting time periods are generally a month, a quarter, or a year. z The accounting time period of one year in length is usually known as a fiscal year . z The accounting period used by most businesses coincides with the calendar year (January 1 to December 31).
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ACCRUAL BASIS OF ACCOUNTING ACCRUAL BASIS OF ACCOUNTING z Under cash-basis accounting , revenue is recorded only when cash is received, and expenses are recorded only when paid. z Generally accepted accounting principles require accrual basis accounting because the cash basis often causes misleading financial statements. z The revenue recognition and matching principles are used under the accrual basis of accounting .
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REVENUE RECOGNITION PRINCIPLE REVENUE RECOGNITION PRINCIPLE z Revenue should be recognized in the accounting period in which it is earned. z In a service business, revenue is considered to be earned at the time the service is performed.
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THE MATCHING PRINCIPLE THE MATCHING PRINCIPLE z Efforts (expenses) be matched with accomplishments (revenues). Revenues earned this month are offset against. ... expenses incurred in earning the revenue
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GAAP RELATIONSHIPS IN REVENUE AND EXPENSE RECOGNITION GAAP RELATIONSHIPS IN REVENUE AND EXPENSE RECOGNITION Time-Period Assumption Revenue-Recognition Principle Matching Principle Economic life of business can be divided into artificial time periods Revenue recognized in the accounting period in which it is earned Expenses matched with revenues in the period when efforts are expended to generate revenues
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ADJUSTING ENTRIES Adjusting entries are made in order for: 1 Revenues to be recorded in the period in which they are earned , and for. ..... 2
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ch03 - PREVIEW OF CHAPTER 3 PREVIEW ADJUSTING THE ACCOUNTS...

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