Measuring Business Income: The Adjusting Process potx

Measuring Business Income: The Adjusting Process Chapter 3 Distinguish accrual accounting from cash-basis accounting. Objective 1 Accrual-basis: Transactions are recorded when revenues are earned or expenses are incurred. Cash-basis: Transactions are recorded when cash is paid or cash is received. The Two Bases of Accounting: Accrual Versus Cash Example ✔ In January 2002, Prensa Insurance sells a three-year health insurance policy to a business client. ✔ The contract specifies that the client had to pay $150,000 in advance. ✔ Yearly expenses amount to $20,000. ✔ What is the income or loss? Accrual Versus Cash Example Accrual-Basis Accounting 2002 2003 2004 (000 omitted) Revenues $50 $50 $50 Expenses 20 20 20 Net income (loss) $30 $30 $30 Accrual Versus Cash Example Cash-Basis Accounting 2002 2003 2004 (000 omitted) Cash inflows $150 $ 0 $ 0 Cash outflows 20 20 20 Net income (loss) $130 ($20) ($20) Managers adopt an artificial period of time to evaluate performance. Accounting Period Monthly Quarterly Semi-annually Interim Period Statements Apply the revenue and matching principles. Objective 2 Revenue Principle ✔ When is revenue recognized? ✔ When it is deemed earned. ✔ Recognition of revenue and cash receipts do not necessarily occur at the same time. [...]... Requires that income be measured accurately each period Objective 3 Make adjusting entries Adjusting Entries Assign revenue to the period earned Assign expenses to the period incurred Bring related asset and liability accounts into correct balance Two Types Of Adjusting Entries Prepaids or Deferrals Accruals Five Categories Of Adjusting Entries Prepaid expenses Accrued revenues Depreciation Accrued... settlement Accrued Expenses Example Employees at Mary Business Services are paid every Friday Weekly salaries total $30,000 The business is closed on Saturday and Sunday The employees were last paid on April 26, which was a Friday They will be paid on May 3 Accrued Expenses Example April May 1 2 3 26 27 28 29 30 Accrued Expenses Example What is the adjusting entry on April 30? They worked April 29 and... 12,000 Salaries Payable 12,000 To accrue salary expense Accrued Revenues Example During the month of April, Mary Business Services rendered services to customers totaling $15,000 At the end of April, the customers have not as yet been billed Accrued Revenues Example What is the April 30 adjusting entry? April 30, 2005 Accounts Receivable 15,000 Service Revenue 15,000 To accrue service revenue Accrued... Insurance Expense 12,000 Prepaid Insurance 12,000 To record insurance expense Prepaid Insurance Example What was the determining factor in matching this expense? Time Supplies Example Wood Enterprise started business the beginning of the month $800 worth of office supplies were purchased on November 15, 2004, for cash Supplies Example Office Supplies 800 Cash 800 An inventory at month end indicated that $200 . Measuring Business Income: The Adjusting Process Chapter 3 Distinguish accrual accounting from cash-basis accounting. Objective. requires that accounting information be reported at regular intervals. Make adjusting entries. Objective 3 Adjusting Entries ✔ Assign revenue to the period earned. ✔ Assign expenses to the. or Deferrals Accruals Two Types Of Adjusting Entries Prepaid expenses Depreciation Accrued expenses Accrued revenues Unearned revenues Five Categories Of Adjusting Entries 24,000 CashPrepaid