Accounting Notes Ch.3 - Accounting Notes\/CHAPTER 3 Explain the accounting period assumption cash versus accrual accounting the matching principle and

Accounting Notes Ch.3 - Accounting Notes/CHAPTER 3 Explain...

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Unformatted text preview: Accounting Notes */CHAPTER 3/* Explain the accounting period assumption, cash versus accrual accounting, the matching principle, and the materiality concept - The Accounting Period The accounting period assumption is the division of a business's life into shorter, equal time periods to permit periodic reporting. Besides annual reporting, monthly statements are also common. - Ca s h a c c o u n ti n g v e r s u s a c cr u al a c c o u n ti n g Un d e r t h e c a s h b a si s, a b u si n e s s r e c or d s r e v e n u e s w h e n it r e c eiv e s t h e c a s h . Th e fir m r e c or d s e x p e n s e s w h e n it p a y s o u t c a s h . Th e a c c r u al b a si s s t a t e s t h a t a b u si n e s s s h o ul d r e c o g niz e r e v e n u e s w h e n it p e rfor m s s e r vic e or s ells a pr o d u c t. It t h e n m a t c h e s wit h t h e s e r e v e n u e s all e x p e n s e s inc urr e d g e n er at e rev e nu e s. Th e b al a n c e s h e e t wo uld m o r e a c c u r a t ely r efl e c t t h e fin a n ci al p o sitio n u si n g a c cr u al a c c o u n tin g. Th e m a t c hi n g p rincipl e a n d t h e m a t e ri ality c o n c e p t Th e m a t c hi n g p rincipl e s t a t e s t h a t inco m e infor m a tio n is b e t t e r w h e n w e a s si g n e x p e t o t h e s a m e a c c o u n ti n g p e rio d t h a t w e e a r n r e v e n u e s . Th e m a t e ri ality c o n c e p t p e r mit s a n e x c e p tio n t o a dj u s tin g e n t ri e s. If t h e a m o u n t is s m it allow s u s t o s kip t h e a dj u s t m e n t . Expl ai n t h e p u r p o s e of a dj u s ti n g e n t ri e s - Adju s tin g e n t ri e s a r e jour n al e n t ri e s t h a t u p d a t e t h e g e n e r al le d g e r a c c o u n t s t o s t a t e r e v e n u e s , e x p e n s e s , a s s e t s , lia biliti e s, a n d o w n e r's e q uity. D e s crib e a n d pr e p a r e a dj u s ti n g e n t ri e s for pr e p ai d e x p e n s e s - A pr e p ai d e x p e n s e a dj u s t m e n t r e q uir e s t h e alloc a tio n of a pr e vio u sly p ai d a n d r e c or d c o s t b e t w e e n t h e c urr e n t a n d fut ur e p e rio d s. Id e n tify t h e a c c o u n t s r e q uirin g a dj u s t m e n t D e t e r mi n e t h e c orr e c t a m o u n t Pr e p a r e t h e a dj u s tin g e n t ri e s Adju s t m e n t of pr e p ai d in s ur a n c e St e p 1: Ass e t Acco u n t: Pr e p ai d Ins u r a n c e 6 0 0 Exp e n s e Acco u n t: Ins u r a n c e Ex p e n s e 0 St e p 2: 6 0 0 o n D e c 1 for a 1-y e a r p olicy Wis h: Pr e p ai d Ins ur a n c e 5 5 0 Ins ur a n c e Exp e n s e 5 0 St e p 3: Ins ur a n c e Exp e n s e 5 0 Pr e p ai d Ins ur a n c e 5 0 Adju s t m e n t of offic e s u p pli e s St e p 1: Ass e t Acco u n t: Offic e Su p pli e s 3 0 0 Exp e n s e Acco u n t: Offic e S u p pli e s Exp e n s e 0 St e p 2: 3 0 0 Offic e Su p pli e s 100 on hand Dec 31 Wish: Office Supplies 100 Supplies Expense 200 Step 3: Supplies Expense 200 Office Supplies 200 Define depreciation expense and prepare entries to record it - Depreciation Expense is the amount of proper t y, plant and equip ment cost that is ass to a given period. - Accumulated depreciation is a contra asset account t hat accu mulates the total depre expense taken on longlived assets. Describe and prepare adjusting entries to record accrued revenues. - Accrued revenues are the revenues earned in t he current period but not yet collected cash or recorded in t he accounts. - Interest = Principal x Interest Rate x (Elapsed ti me in days / 360) - Revenue account (Interest Revenue) - Asset Account (Interest Receivable) Describe and prepare adjusting entries to record accrued expenses - Accrued expenses are expenses that have been incurred in a given period but t hat ha not yet been paid or recorded. - Expense Account (Wages Expense) - Liability Account (Wages Payable) Analyze financial state ment infor mation for reallife companies ...
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