acctng ch 3 notes

acctng ch 3 notes - Adjusting Accounts and Preparing...

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Adjusting Accounts and Preparing Financial Statements I. The accounting cycle A. Steps 1. Analyze transactions 2. Journalize (t account) 3. Post to ledger 4. Prepare unadjusted trial balance a) Flawed 5. Adjust 6. Prepare adjusted trial balance a) More accurate 7. Prepare statements a) Based on adjusted trial balances b) Fair and accurate projections 8. Close 9. Prepare post-closing trial balance II. The accounting period: any amount of time for which a business wants to report A. Annually 1. Fiscal year: 12 months that make up an accounting period (not necessarily calendar year) B. Semiannually, quarterly, monthly III. Accrual basis vs. cash basis A. Accrual: revenues are recognized when they are earned and expenses are recognized when incurred 1. Follows the revenue recognition principle 2. More accurate way representation of the flow of income and expenses 3. Expenses are incurred when the benefits of those expenses are received B. Cash: revenues are recognized when cash is received and expenses are recorded when cash is paid 1. Not consistent with GAAP a) Not used in class b) Not practical for large businesses 2. Follows cash flows of when cash is received or paid C. Example
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1. A company paid $2,400 for a 24 month insurance policy beginning December 1, 2008. 2. Cash basis a) $2,400 would be recognized as an expense for December but no expense would be recognized for the other months that the insurance policy benefits * Would report very low income for December 3. Accrual basis a) $100 of insurance is recognized a in expense for each of the 24 months that the insurance policy benefits IV. Accrual method of accounting A. Revenues 1. Under the revenue recognition principle, revenues are recorded in the accounting period in which they are earned a) Revenues earned = products are delivered or services are preformed B. Expenses 1. Recording should follow matching principle a) Expenses and revenues generated from the benefits of these expenses should be recorded in the same accounting period * Match revenues and expenses C. Example of matching principle 1. For the month of March… a) Paid $600 for 6 months of insurance * $100 debit to expenses for March insurance b) Billed a client $500 for services preformed in March * $500 credit to revenues c) Received $1,000 cash for services to be preformed later in the year * Because the services have not yet been preformed, this is a liability. It therefore has no affect on revenues or expenses. d) Received a bill for $400 for electrical services preformed in March
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acctng ch 3 notes - Adjusting Accounts and Preparing...

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