chapter3 - CHAPTER 3 ADJUSTING THE ACCOUNTS ACCT100 Autumn...

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Chapter 3-1 CHAPTER 3 ADJUSTING THE ACCOUNTS ACCT100 Autumn 2011 Teresa Chu Chapter 3-2 Time Period Assumption Jan. Feb. Mar. Apr. Dec. . . . . . Divide economic life of a business into artificial time periods 1 period is usually a month, a quarter or a year Interim periods: monthly or quarterly Calendar year: January 1 to December 31 Fiscal year: Any 12 months other than calendar year
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Chapter 3-3 Accrual-Basis Accounting Record transactions in the period in which the events occur Recognize revenues when earned , NOT when cash is received Recognize expenses when incurred , NOT when cash is paid GAAP requires accrual-basis Accrual- vs. Cash-Basis Accounting Chapter 3-4 Accrual- vs. Cash-Basis Accounting Cash-Basis Accounting Recognize revenues when cash is received Recognize expenses when cash is paid Advantage: Simple Disadvantage: Misleading financial statements NOT in accordance with generally accepted accounting principles (GAAP)
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Chapter 3-5 Revenue Recognition Principle Recognize revenue in the accounting period in which it is earned EARNED when service is performed OR goods are transferred to customers Chapter 3-6 Matching Principle Match expenses with revenues earned in the same period Efforts (expenses) are matched with accomplishments (revenues)
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Chapter 3-7 GAAP relationships in revenue and expense recognition Illustration 3-1 Chapter 3-8 Require for accrual-basis accounting Ensure that revenue recognition and matching principles are followed To update the accounts in general ledger and ensure correct amounts are reported in BOTH income statement and balance sheet Must be recorded every time a company prepares financial statements Adjusting Entries
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Chapter 3-9 Adjusting Entries 1. Prepaid Expenses. Expenses paid in cash and recorded as assets before they are used or consumed. Deferrals 3. Accrued Revenues. Revenues earned but not yet received in cash or recorded. 4. Accrued Expenses. Expenses incurred but not yet paid in cash or recorded. 2. Unearned Revenues. Revenues received in cash and recorded as liabilities before they are earned. Accruals Chapter 3-10 Payments of cash that is recorded as ASSET because benefits will be received in future Examples: Insurance, supplies, advertising, rent, fixed asset depreciation, etc. When ASSET expires with passage of time (e.g. rent, insurance) or through use (e.g. supplies), EXPENSE is recorded Adjusting entries are made (1) to record expenses that apply to the current accounting period and (2) to show unexpired costs in the asset accounts Prepaid Expenses
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Chapter 3-11 Trial Balance – Analyze each account to determine whether it is complete and up-to-date Phoenix Consulting - Jan. 31st Acct. No Account Debit Credit 100 Cash 50,000 $ 105 Accounts receivable 35,000 110 Prepaid insurance 12,000 120 Equipment 24,000 130 Investments 300,000 200 Accounts payable 20,000 $ 210 Unearned rent revenue 24,000 220 Note payable 200,000 300 Austin, capital 40,000 400 Sales 137,000 421,000 $ 421,000 $
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chapter3 - CHAPTER 3 ADJUSTING THE ACCOUNTS ACCT100 Autumn...

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