Review for AC202

Insurance equipment accounts payable unearned

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Unformatted text preview: tion Principle dictates that revenue be recognized in the accounting period in which it is earned. is considered earned when the service has been provided or when the goods are delivered. 109 Matching Principle... Requires that expenses be recorded in the same period in which the revenues they helped produce are recorded. 110 111 Cash Basis GA AP Cash Basis is not in accordance with GAAP Revenue recorded only when cash is received. Expense recorded only when cash is paid. 112 Accrual Basis Accounting Adheres to the: • Revenue Recognition Principle Revenue recorded only when earned, not when cash is received • Matching Principle Expense recorded only when incurred, not when cash paid 113 Accrual Basis adheres to... •Generally •Accepted •Accounting •Principles 114 Accrual Basis vs. Cash Basis I nsurance Expense 2004 Jan Feb Mar Apr $ May $ Jun $ Jul $ Aug $ S ep $ Oct $ Nov $ Dec $ - $ - $ - $ 2,400 On the cash basis the entire $2,400 would be recognized as insurance expense in 2004. No insurance expense from this policy would be recognized in 2005 or 2006, periods covered by the policy. 115 Accrual Basis vs. Cash Basis I nsurance Expense 2004 Jan Feb Mar Apr $ May $ Jun $ Jul $ Aug $ Sep $ Oct $ Nov $ Dec $ - $ - $ - $ 100 Insurance Expense 2005 Jan Feb Mar Apr $ 100 May $ 100 Jun $ 100 Jul $ 100 Aug $ 100 Sep $ 100 Oct $ 100 Nov $ 100 Dec $ 100 $ 100 $ 100 $ 100 Insurance Expense 2006 Jan Feb Mar Apr $ 100 May $ 100 Jun $ 100 Jul $ 100 Aug $ 100 Sep $ 100 Oct $ 100 Nov $ 100 Dec $ 100 $ 100 $ 100 $ - On the accrual basis $100 of insurance expense is recognized in 2004, $1,200 in 2005, and $1,100 in 2006. The expense is matched with the periods benefited by the insurance coverage. 116 Accrual Basis Accounting Because not ALL ts” items that belong in en the accounting stm dju “A period are “in” that se accounting period, he ll T we must a e C W look for what’s missing, and update our records 117 At the end of the period, we need to make adjusting entries to get the accounts up to date for the financial statements. 118 Adjusting Entries Adjusting entries are needed whenever revenue or expenses affect more than one accounting period. Every adjusting entry involves a change in either a revenue or expense and an asset or liability. That means every adjusting entry will affect both the Income Statement AND the Balance Sheet 119 Adjusting Entries Adjusting entries make the: revenue recognition & matching principles HAPPEN! 120 Types of Adjusting Entries Prepayments: Prepaid expenses: Expenses paid in cash and recorded as assets before they are used or consumed. Unearned Revenues: Cash received and recorded as liabilities before revenue is earned. Accruals: Accrued revenues: Revenues earned but not yet received in cash or recorded. Accrued expenses: Expenses incurred but not yet paid in cash or recorded. 121 Prepayments •PREPAID EXPENSES ­ Costs that expire either with the passage of time or through use. •UNEARNED REVENUES­ money has been received before the goods or services are provided. 122 You can start with the trial balance to find information to adjust prepayments. 123 Sierra Corporation Trial Balance October...
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