AFM 101 Chapter 4 Notes - AFM 101 Chapter 4 Notes Adjusting...

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AFM 101 Chapter 4 Notes Adjusting revenues and expenses The accounting cycle is the process used by businesses/ entities to analyze and record transactions, adjust records at the end of the fiscal period, prepare financial statements, and prepare the records for next year. - During period: record journal entries and post to ledger - After: adjust entries, make financial statements, and close Purpose and types of adjustments - Adjusting entries are journal entries done at the end of an accounting period to ensure that all revenue and expenses have been recorded and accounted for o In addition to making sure revenues and expenses are recorded when it is earned or incurred, adjustments also make sure assets are reported at it’s correct amount to represent the probable future benefits it has to provide o as well as making sure liabilities represent future sacrifices of assets owed in the future - The reason why this is done at the end is because it would be very time consuming to do this every day Types of adjustments - Deferred Revenues : if customers pay cash in advance, and you do the work in the future (but before period is over), you will adjust by debiting the deferred revenues liability account and credit revenue - Accrued Revenues : revenues earned but not yet recorded usually because cash was received after the services were performed o Note that after the period, customer may not pay cash and may be credit, in which case you debit A/R instead of cash, and credit revenue/ - Deferred Expenses : This is basically adjustments for prepayments, supplies and depreciation. It is to change the value of previously recorded assets due to paying cash in advance. We must allocate a portion of this asset as an expense for the period - Accrued Expenses : Expenses that have been incurred but not yet recorded due to cash being paid after goods/ services were used. All adjustments have two parts 1. Record the cash receipt or payment 2. Record the revenue or expense in the proper period Adjustment Process Almost every account except cash needs adjustments, but we only do the important ones. This is why estimates and judgement is important To analyze adjustments there are 3 steps 1. Identifying the type of adjustment a. If cash has been paid or received, then adjustment is either deferred revenue or expense. This is because the cash received in advance is deferred revenue, and cash paid in advance would be prepaid assets which are currently overstated. We must adjust to show that revenue were earned (if both criteria is satisfied) and make sure the assets and expenses are not over or under stated.
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  • Fall '08
  • KENNEDY
  • Trial Balance, Generally Accepted Accounting Principles

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