Week 5 Lecture Notes (2 slides)

Week 5 Lecture Notes (2 slides) - THE UNIVERSITY OF NEW...

Info iconThis preview shows pages 1–4. Sign up to view the full content.

View Full Document Right Arrow Icon
THE UNIVERSITY OF NEW SOUTH WALES Australian School of Business School of Accounting ACCT 1501: Accounting and Financial Management 1A Week 5 ACCRUAL ACCOUNTING ADJUSTMENTS Student Handout Lecturer: Dr. Youngdeok Lim School of Accounting UNSW QUAD 3069 youngdeok.lim@unsw.edu.au Blackboard: http://telt.unsw.edu.au .
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
WEEK 5: Accrual Accounting Adjustments 1. Introduction Accrual accounting exists because cash flow information is not complete enough to assets financial performance or financial position. Keeping track of cash flow is crucial for business success, but it is not enough. We have to go beyond cash flow to assess economic performance more broadly and to assess non-cash resources and obligations. We do this although it forces us to make estimates, judgements and other accounting choice that, in turn, make the results less precise than we would wish, and more subjective than transaction-based cash flow figures. This week, we explore two concepts: adjusting entries and closing entries. Adjusting entries are the steps required to ensure accounts are “correct”. Some of our steps in the recording process result in the accounts being incorrect; this is mainly for reasons of convenience. For example, we don’t record a wages expense for every hour (or minute, or second, or millisecond, where will it end?) that is worked. Instead, in order to spend less time accounting and more time actually doing business, we tolerate some inaccuracies. However, once we get to the end of the accounting period, when we are about to prepare financial statements, accuracy starts to matter. We want to make sure that all assets, liabilities, revenues and expenses are recorded correctly. To make sure this happens, we have to adjust the accounts . The process of undertaking adjusting entries exists to correct for any inaccuracy we have allowed in the recording process. The basic deal with adjusting entries is simple. First ask the question: How did we record it? Then ask the question: How should it have been recorded? Then fix it. Closing entries have a simple purpose. Revenues and expenses are just changes in Retained Profits. The only reason we keep them separate from Retained Profits is to simplify financial statements preparation. Once we’ve done our financial statements, we can lump revenues and expenses back where they belong: into Retained Profits. This also has one other neat effect – these accounts will now be set back to zero, ready to start counting transactions in the new accounting period.
Background image of page 2
Learning objectives At the end of this topic you should be able to: Explain how the timing of revenue and expense recognition differs from cash inflows and outflows Prepare journal entries for accrual accounting adjustments Understand contra accounts and the impact on the financial statements Understand and perform the closing process Required Reading Trotman & Gibbins Chapter 4 (pages 174-177) and Chapter 5 2. Tutorial Questions – Week 6 Students should attempt these questions before the tutorial.
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 4
This is the end of the preview. Sign up to access the rest of the document.

Page1 / 34

Week 5 Lecture Notes (2 slides) - THE UNIVERSITY OF NEW...

This preview shows document pages 1 - 4. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online