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Unformatted text preview: Ch4OL BUS 214, Financial Accounting Chapter 4 Outline A. Revenue recognition principle. Revenue is recognized when it is Earned. Revenue is earned when the major earning activities have been completed by the selling company that usually is when title to the sold item or service passes to the customer. B. Matching principle. Recognize expenses when the related revenue is recognized. C. Adjusting entries. Adjusting entries update the accounts. Adjusting entries are necessary for: 1. Expiration of Prepayments, e.g., Prepaid insurance A Credit to Prepaid insurance and a Debit to the related Insurance expense account 2. Usage of Inventories, e.g., Supplies inventory A Credit to Supplies inventory and a Debit to the related Supplies expense account 3. Recognition of Depreciation (Credit Accumulated depreciation, an Asset Contra account), e.g., Building depreciation A Credit to Accumulated depreciation and a Debit to the related Depreciation expense account 4. Realization of Unearned revenues, e.g., Reduction in Unearned subscription revenue A Debit to Unearned revenue and a Credit to the related Subscription revenue account 5. Accrual of Expenses incurred, but not paid, and e.g., Interest payable A Credit to Interest payable and a Debit to the related Interest expense account, Salaries payable A Credit to Salaries payable and a Debit to the related Salary expense account. 6. Accrual of Revenues earned, but not collected. e.g., Interest receivable A Debit to Interest receivable and a Credit to the related Interest revenue account D. Closing the books. This involves the closing (transferring) of temporary account balances to Retained Earnings. Temporary accounts include: Revenue and gain accounts, Expense and loss accounts, and Dividend account(s). AccountingCycle BUS 214, Financial Accounting The Accounting Cycle Step 1 Use a JOURNAL or JOURNALS to record transactions and events in a sequential manner as the transactions or events occur. Step 2 Post the entries from Step 1 into ACCOUNTS in a LEDGER. These accounts are presented as T- accounts in Accounting Courses. Step 3 Prepare ADJUSTING ENTRIES at the end of each ACCOUNTING PERIOD (i.e., a month, a quarter, or a year) to update the accounts. This is when things such as Depreciation expense, Rent expense, Insurance expense, and Interest expense are recorded. Step 4 Prepare FINANCIAL STATEMENTS Income Statement for the period (i.e., Month, Quarter, or Year) ended date (e.g. March 31, 2006) Stockholders Equity Statement for the period (i.e., Month, Quarter, or Year) ended date (e.g. March 31, 2006) Balance Sheet as of a date (e.g., March 31, 2006). Cash Flow Statement for the period (i.e., Month, Quarter, or Year) ended date (e.g. March 31, 2006) All financial statements should have the following in their HEADING Company Name Name of Statement Date or Period (i.e., Month, Quarter, or Year) Ended Step 5 Close the TEMPORARY Retained Earnings Accounts (i.e., Revenues, Gains, Expenses, Losses,Close the TEMPORARY Retained Earnings Accounts (i....
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