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ACC151Chapt3 - EXAM 2 Chapter 3 Preparing Financial...

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EXAM 2 Chapter 3: Preparing Financial Statements THE ACCOUNTING PERIOD What happens if something starts in September and gets billed in October? ACCRUAL BASIS V. CASH BASIS Accrual Basis : revenues are recognized when earned and incurred Date D C 12/1 Prepaid Insurance Cash Prepaid for insurance 2400 2400 Date D C 12/31 Insurance Expense Prepaid Insurance Used insurance 100 100 Prepaid Insurance Insurance Expense 100 100 2400 100 2300 Cash Basis : revenues are recognized when cash is received and expenses recorded when paid NOT ACCORDING TO GAAP!*** = expenses overstated in December 2011 and understated in 2012 & 2013 Date D C 12/1 Insurance Expense Cash Paid insurance 2400 2400 RECOGNIZING EXPENSES Revenue recognition Matching ADJUSTING ACCOUNTS An adjusting entry is recorded to bring an asset or liability account balance to its proper amount. Framework for Adjustments Paid for (or received) cash before expense (or revenue) recognized o Prepaid (Deferred) Expenses [including depreciation]: paid for prior to receiving benefits
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o Unearned (Deferred) Revenues : cash received in advance of providing products or services Paid for (or received) cash after expense (or revenue) recognized o Accrued Expenses : Costs incurred in a period that are both unpaid and unrecorded o Accrued Revenues : earned in a period that are both unrecorded and not yet received; make the assumption that the client is billed EX: Prepaid SUPPLIES) During 2011, Scott Company purchased $15,500 of supplies. Scott recorded the expenditures as Supplies. On December 31, a count of the supplies indicated $2,655 on hand. What adjustment is required?
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