1 Generally accepted accounting principles require the use of the accrual basis

1 generally accepted accounting principles require

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1. Generally accepted accounting principles require the use of the accrual basis, in which revenues are recorded when earned and expenses are recorded when incurred, the matching principle establishes the basis for accrual accounting and the necessity for adjusting entries. 2. Matching Principle: states that all expenses related to the production of revenues be deducted from (matched with) those revenues to determine the most accurate net income or loss for the specific accounting period. The Adjustment Process 1. Prepaid Expense (Asset): an expense paid for in advance of its actual incurrence. When it is initially recorded as an asset, we need to determine at the end of the accounting period how much of the asset has been used up and become and expense . a. Adjusting Entry: Dr. Expense Cr. Asset
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2. Depreciation: the periodic write-off of the cost of a plant asset to expense. It is a measure of the decline in usefulness of the plant asset. A plant asset is a property owned by the business and upon being used, and expense is being incurred, a. Plant Asset: long-lived assets of a tangible nature that are used in the operation of the business. Examples: machinery, equipment, furniture, motor vehicles, buildings, land, etc. Land is the only plant asset that is not depreciated. b. Adjusting Entry: Dr. Depreciation Expense – Plant Asset Title Cr. Accumulated Depreciation- Plant Asset Title 3. Unearned Revenue (Liability): a revenue received in advance of being earned. When it is initially recorded as a liability, we need to determine at the end of the accounting period how much revenue has been earned . a. Adjusting Entry: Dr. Liability Cr. Revenue 4. Accrued Expense (Liability): an expense that has been incurred but that has not been paid. a. Adjusting Entry: Dr. Expense Cr. Liability 5. Accrued Revenue (Liability): a revenue that has been earned but that has not been received. a. Adjusting Entry: Dr. Asset (Receivable) Cr. Revenue
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  • Fall '14
  • CarolRowey
  • Generally Accepted Accounting Principles, Dr. Expense

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