BMGT 220 Chapter 03

BMGT 220 Chapter 03 - Slide 3-1 Adjusting the Accounts...

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Unformatted text preview: Slide 3-1 Adjusting the Accounts Financial Accounting, Seventh Edition Slide 3-2 GAAP Relationships Slide 3-3 Generally a month , a quarter , or a year Fiscal year vs. calendar year Also known as the Periodicity Assumption Time Period Concept Accountants divide the economic life of a business into artificial time periods ( Time Period Assumption ). Jan. Feb. Mar. Apr. Dec. . . . . . Slide 3-4 We have delivered the product to our customer, so I think we should record the revenue earned. Revenue Recognition Principle Slide 3-5 Expense Recognition Principle (Matching Principle) Recognizing Revenues and Expenses Match expenses with revenues in the period when the company makes efforts to generate those revenues. Let the expenses follow the revenues. Slide 3-6 On the cash basis the entire $2,400 would be recognized as insurance expense in September 2011. No insurance expense from this policy would be recognized in 2012 or 2013, periods covered by the policy. Cash Basis Accounting (NOT ALLOWED UNDER GAAP) E x a m p l e : A c o m p a n y p a i d $ 2 , 4 0 0 f o r a 2 4 m o n t h i n s u r a n c e p o l i c y o n S e p t e m b e r 1 , 2 0 1 1 . Jan Feb Mar Apr- $ - $ - $ - $ May Jun Jul Aug- $ - $ - $ - $ Sep Oct Nov Dec 2,400 $ - $ - $ - $ Insurance Expense 2011 Slide 3-7 Accrual Basis of Accounting (REQUIRED BY GAAP) On the accrual basis, only $400 of insurance expense is recognized in 2011, $1,200 in 2012, and $800 in 2013. The expense is matched with the periods benefited by the insurance coverage. Jan Feb Mar Apr- $ - $ - $ - $ May Jun Jul Aug- $ - $ - $ - $ Sep Oct Nov Dec 100 $ 100 $ 100 $ 100 $ Jan Feb Mar Apr 100 $ 100 $ 100 $ 100 $ May Jun Jul Aug 100 $ 100 $ 100 $ 100 $ Sep Oct Nov Dec 100 $ 100 $ 100 $ 100 $ Jan Feb Mar Apr 100 $ 100 $ 100 $ 100 $ May Jun Jul Aug 100 $ 100 $ 100 $ 100 $ Sep Oct Nov Dec- $ - $ - $ - $ Insurance Expense 2011 Insurance Expense 2012 Insurance Expense 2013 Slide 3-8 Adjusting entries - needed to ensure that the revenue recognition and matching principles are followed. 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. The Basics of Adjusting Entries Slide 3-9 Adjustments An adjusting entry is recorded to bring an asset or liability account balance to its proper amount. Paid (or received) cash before expense (or revenue) recognized Paid (or received) cash after expense (or revenue) recognized Pre pa id (De fe rre d) e xpe ns e s Une a rne d (De fe rre d) re ve nue s Ac c rue d e xpe ns e s Ac c rue d re ve nue s Fra m e wo rk fo r Adjus ting Entrie s Framework for Adjusting Entries Slide 3-10 Types of Adjusting Entries 1. Prepaid Expenses....
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BMGT 220 Chapter 03 - Slide 3-1 Adjusting the Accounts...

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