Chapter 03

Chapter 03 - ADJUSTING ACCOUNTS AND PREPARING FINANCIAL...

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ADJUSTING ACCOUNTS AND PREPARING FINANCIAL STATEMENTS Chapter 3
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McGraw-Hill/Irwin Slide 2 1 2 3 4 5 6 7 8 9 10 11 12 1 2 3 4 Annually 1 2 Monthly Quarterly Semiannually THE ACCOUNTING PERIOD Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
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McGraw-Hill/Irwin Slide 3 ACCRUAL BASIS VS. CASH BASIS On the cash basis the entire $2,400 would be recognized as insurance expense in 2009. No insurance expense from this policy would be recognized in 2010 or 2011, periods covered by the policy. On the cash basis the entire $2,400 would be recognized as insurance expense in 2009. No insurance expense from this policy would be recognized in 2010 or 2011, periods covered by the policy. Jan Feb Mar Apr - $ - $ - $ - $ May Jun Jul Aug - $ - $ - $ - $ Sep Oct Nov Dec - $ - $ - $ 2,400 $ Insurance Expense 2009
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McGraw-Hill/Irwin Slide 4 ACCRUAL BASIS VS. CASH BASIS Jan Feb Mar Apr - $ - $ - $ - $ May Jun Jul Aug - $ - $ - $ - $ Sep Oct Nov Dec - $ - $ - $ 100 $ Jan Apr 100 $ 100 $ 100 $ 100 $ Jun Jul Aug 100 $ 100 $ 100 $ 100 $ Oct Nov Dec 100 $ 100 $ 100 $ 100 $ Jan Apr 100 $ 100 $ 100 $ 100 $ Jun Jul Aug 100 $ 100 $ 100 $ 100 $ Oct Nov Dec 100 $ 100 $ 100 $ - $ Insurance Expense 2009 Insurance Expense 2010 Insurance Expense 2011 On the accrual basis $100 of insurance expense is recognized in 2009, $1,200 in 2010, and $1,100 in 2011. The expense is matched with the periods benefited by the insurance coverage. On the accrual basis $100 of insurance expense is recognized in 2009 , $1,200 in 2010 , and $1,100 in 2011 . The expense is matched with the periods benefited by the insurance coverage.
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McGraw-Hill/Irwin Slide 5 Accounting ACCRUAL BASIS VS. CASH BASIS Accrual Basis Recognize revenues when they are earned and records expenses when they are incurred (match with revenues). Cash Basis Recognize revenue when cash is received and records expenses when cash is paid . Not GAAP Not GAAP
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McGraw-Hill/Irwin Slide 6 THE NEED FOR ADJUSTING ENTRIES The need for adjusting entries does not mean that transactions are being recorded improperly. The purpose of adjusting entries is to ensure that revenue and expenses are recognized in the right accounting period under the accrual concept. We rely on two principles in the adjusting process: revenue recognition and matching.
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McGraw-Hill/Irwin Slide 7 ADJUSTING ACCOUNTS Prepaid (Deferred) expenses* Prepaid (Deferred) expenses * Unearned (Deferred) revenues Unearned (Deferred) revenues Accrued expense Accrued expense Accrued revenues Accrued revenues Framework for Adjustments * including depreciation Paid (or received) cash before expense (or revenue) recognized Paid (or received) cash before expense (or revenue) recognized Paid (or received) cash after expense (or revenue) recognized Paid (or received) cash after expense (or revenue) recognized Adjustments Adjustments
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McGraw-Hill/Irwin Slide 8 Here is the check for my 24-month insurance policy. Here is the check for my 24-month insurance policy. PREPAID (DEFERRED) EXPENSES Resources paid for prior to receiving the actual benefits.
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Chapter 03 - ADJUSTING ACCOUNTS AND PREPARING FINANCIAL...

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