This chapter discusses adjusting entries and the accrual basis of accounting. It explains that adjusting entries are necessary to ensure revenues and expenses are recorded in the correct periods according to accounting principles. The chapter identifies major types of adjusting entries including deferrals, such as prepaid expenses and unearned revenues, and accruals, such as accrued revenues and accrued expenses. It also discusses the adjusted trial balance.
This chapter discusses adjusting entries and the accrual basis of accounting. It explains that adjusting entries are necessary to ensure revenues and expenses are recorded in the correct periods according to accounting principles. The chapter identifies major types of adjusting entries including deferrals, such as prepaid expenses and unearned revenues, and accruals, such as accrued revenues and accrued expenses. It also discusses the adjusted trial balance.
This chapter discusses adjusting entries and the accrual basis of accounting. It explains that adjusting entries are necessary to ensure revenues and expenses are recorded in the correct periods according to accounting principles. The chapter identifies major types of adjusting entries including deferrals, such as prepaid expenses and unearned revenues, and accruals, such as accrued revenues and accrued expenses. It also discusses the adjusted trial balance.
This chapter discusses adjusting entries and the accrual basis of accounting. It explains that adjusting entries are necessary to ensure revenues and expenses are recorded in the correct periods according to accounting principles. The chapter identifies major types of adjusting entries including deferrals, such as prepaid expenses and unearned revenues, and accruals, such as accrued revenues and accrued expenses. It also discusses the adjusted trial balance.
LEARNING OBJECTIVES After studying this chapter, you should be able to:
1. Explain the time period assumption.
2. Explain the accrual basis of accounting. 3. Explain the reasons for adjusting entries. 4. Identify the major types of adjusting entries. 5. Prepare adjusting entries for deferrals. 6. Prepare adjusting entries for accruals. 7. Describe the nature and purpose of an adjusted trial balance.
3-3 Timing Issues Learning Objective 1 Accountants divide the economic life of Explain the time period a business into artificial time periods assumption. (Time Period Assumption).
..... Jan. Feb. Mar. Apr. Dec.
Generally a month, a quarter, or a year.
Also known as the “Periodicity Assumption”
3-4 LO 1 Fiscal and Calendar Years
Monthly and quarterly time periods are called interim
periods. Most large companies must prepare both quarterly and annual financial statements. Fiscal Year = Accounting time period that is one year in length. Calendar Year = January 1 to December 31.
3-5 LO 1 Fiscal and Calendar Years
Question The time period assumption states that:
a. companies must wait until the calendar year is
completed to prepare financial statements.
b. companies use the fiscal year to report financial
information.
c. the economic life of a business can be divided into
artificial time periods.
d. companies record information in the time period in
which the events occur. 3-6 LO 1 Accrual- versus Cash-Basis Accounting Learning Accrual-Basis Accounting Objective 2 Explain the accrual basis of Transactions recorded in the periods in accounting. which the events occur. Companies recognize revenues when they perform services (rather than when they receive cash). Expenses are recognized when incurred (rather than when paid).
3-7 LO 2 Accrual- versus Cash-Basis Accounting
Cash-Basis Accounting Revenues are recorded when cash is received. Expenses are recorded when cash is paid. Cash-basis accounting is not in accordance with International Financial Reporting Standards (IFRS).
3-8 LO 2 Recognizing Revenues and Expenses
REVENUE RECOGNITION PRINCIPLE
Recognize revenue in the accounting period in which the performance obligation is satisfied.
3-9 LO 2 Recognizing Revenues and Expenses
EXPENSE RECOGNITION PRINCIPLE
Match expenses with revenues in the period when the company makes efforts to generate those revenues. “Let the expenses follow the revenues.”
3-10 LO 2 Illustration 3-1 IFRS relationships in revenue and expense recognition
3-11 LO 2 Recognizing Revenues and Expenses
Question The revenue recognition principle states that:
a. revenue should be recognized in the accounting period in
which a performance obligation is satisfied.
b. expenses should be matched with revenues.
c. the economic life of a business can be divided into artificial
time periods.
d. the fiscal year should correspond with the calendar year.
3-12 LO 2 Why Accuracy ETHICS INSIGHT Krispy Kreme (USA) Matters Cooking the Books? Allegations of abuse of the revenue recognition principle have become all too common in recent years. For example, it was alleged that Krispy Kreme (USA) sometimes doubled the number of doughnuts shipped to wholesale customers at the end of a quarter to boost quarterly results. The customers shipped the unsold doughnuts back after the beginning of the next quarter for a refund. Conversely, Computer Associates International (USA) was accused of backdating sales—that is, reporting a sale in one period that did not actually occur until the next period in order to achieve the earlier period’s sales targets.
3-13 LO 2 > DO IT! A list of concepts is provided in the left column below, with a description of the concept in the right column below. There are more descriptions provided than concepts. Match the description of the concept to the concept.
f Accrual-basis accounting. 1. ___ (a) Monthly and quarterly time periods. e Calendar year. (b) Efforts (expenses) should be matched 2. ___ with results (revenues). c Time period assumption. 3. ___ (c) Accountants divide the economic life of b Expense recognition 4. ___ a business into artificial time periods. principle. (d) Companies record revenues when they receive cash and record expenses when they pay out cash. (e) An accounting time period that starts on January 1 and ends on December 31. (f) Companies record transactions in the period in which the events occur. 3-14 LO 2 The Basics of Adjusting Entries Learning Objective 3 Adjusting Entries Explain the reasons for Ensure that the revenue recognition and adjusting entries.
expense recognition principles are followed.
Necessary because the trial balance may not contain up-to-date and complete data. Required every time a company prepares financial statements. Will include one income statement account and one statement of financial position account.
3-15 LO 3 Adjusting Entries
Question Adjusting entries are made to ensure that:
a. expenses are recognized in the period in which they are
incurred.
b. revenues are recorded in the period in which services are
performed.
c. statement of financial position and income statement accounts
have correct balances at the end of an accounting period.
d. All the responses above are correct.
3-16 LO 3 Types of Adjusting Entries Learning Objective 4 Identify the major types of adjusting entries. Deferrals Accruals
1. Prepaid Expenses. 1. Accrued Revenues.
Expenses paid in cash Revenues for services before they are used or performed but not yet consumed. received in cash or recorded. 2. Unearned Revenues. 2. Accrued Expenses. Cash received before Expenses incurred but not services are performed. yet paid in cash or recorded.
Illustration 3-2 Categories of adjusting entries
3-17 LO 4 Illustration 3-3 Trial balance Each account is analyzed to determine whether it is complete and up-to-date for financial statement purposes. 3-18 LO 4 Adjusting Entries for Deferrals Learning Deferrals are expenses or revenues that Objective 5 Prepare adjusting are recognized at a date later than the point entries for deferrals. when cash was originally exchanged. There are two types: Prepaid expenses and Unearned revenues.
3-19 LO 5 PREPAID EXPENSES
Payments of expenses that will benefit more than one
