BMGT 220 - Chapter 3

# BMGT 220 - Chapter 3 - CHAPTER 3 Adjusting Accounts...

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Adjusting Accounts and Preparing Financial Statements Adjusting Accounts and Preparing Financial Statements C H A P T E R 3

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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
Accrual Basis vs. Cash Basis Jan Feb Mar Apr - \$ - \$ - \$ - \$ May Jun Jul Aug - \$ - \$ - \$ - \$ Sep Oct Nov Dec - \$ - \$ - \$ 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 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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We have delivered the product to our customer, so I think we should record the revenue earned. We have delivered the product to our customer, so I think we should record the revenue earned. Recognizing Revenues Revenue Recognition Principle - Recognize revenue when it is earned .
Recognizing Expenses Matching Principle Must match Expenses with Revenues Earned (as a result of those expenses) in the same accounting period Summary of Expenses Rent Gasoline Advertising Salaries Utilities and . . . . \$1,000 500 2,000 3,000 450 . . . . Now that we have recognized the revenue, let’s see what expenses we incurred to generate that revenue. Now that we have recognized the revenue, let’s see what expenses we incurred to generate that revenue.

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Knowledge Check # 1: The broad principle that requires expenses to be reported in the same period as the revenues that were earned as a result of the expenses is the:   1. Revenue Recognition principle. 2. Cost principle. 3. Matching principle. 4. Time period principle.
Adjustments Adjustments An adjusting entry is recorded to bring an asset or liability account balance to its proper amount. Adjusting Accounts 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 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 Received

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Tips for Adjusting Entries 1 .
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