Explain the revenue recognition principle and the matching principle. Differentiate between the cash basis and the accrual basis of accounting. Explain why adjusting entries are needed and identify the major types of adjusting entries. Prepare adjusting entries for prepayments. Prepare adjusting entries for accruals. Describe the nature and purpose of the adjusted trial balance. Explain the purpose of closing entries. Describe the required steps in the accounting cycle.
1 ACCRUAL ACCOUNTING CONCEPTS Accrual Accounting Concepts Explain the revenue recognition principle and the matching principle Differentiate between the cash basis and the accrual basis of accounting Explain why adjusting entries are needed and identify the major types of adjusting entries Prepare adjusting entries for prepayments Accrual Accounting Concepts Prepare adjusting entries for accruals Describe the nature and purpose of the adjusted trial balance Explain the purpose of closing entries Describe the required steps in the accounting cycle 11 Time Period Assumption Divides the economic life of a business into artificial time periods WHY? to provide immediate feedback on how the business is doing Time Period Assumption Generally a month, a quarter, or a year An accounting time period that is one year long is called a fiscal year An accounting time period that starts on January and ends December 31 is called a calendar year Revenue Recognition 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 Matching Principle Requires that expenses be recorded in the same period in which the revenues they helped produce are recorded Review Which principle dictates that efforts (expenses) be recorded with accomplishments (revenues)? a Cost Principle b Matching Principle c Periodicity Principle d Revenue Recognition Principle 10 Temporary Permanent All revenues accounts All asset accounts All expense accounts All liability accounts Dividends Stockholders’ equity accounts Close Temporary Accounts Only Zero balance after closing entries! Do not close! 52 The Closing Process 11 The Accounting Cycle 57 Required Steps in the Accountin g Cycle 58 Review Which is not a temporary account? a.Salaries expense b.Service revenue c.Accounts Receivable d.Dividends 59 Review Which is not a temporary account? a.Salaries expense b.Service revenue c.Accounts Receivable d.Dividends 60 Review Which account will have a zero balance after closing entries? a.Service Revenue b.Advertising Supplies c.Prepaid Insurance d.Accumulated Depreciation 61 Review Which account will have a zero balance after closing entries? a.Service Revenue b.Advertising Supplies c.Prepaid Insurance d.Accumulated Depreciation 62 Review Which types of accounts will appear in the post-closing trial balance? a.Temporary accounts b.Accounts shown in the income statement c.Permanent accounts d.All of the above 63 Review Which types of accounts will appear in the post-closing trial balance? a.Temporary accounts b.Accounts shown in the income statement c.Permanent accounts d.All of the above 64 Copyright © 2008 John Wiley & Sons, Inc All rights reserved Reproduction or translation of this work beyond that named in Section 117 of the United States Copyright Act without the express written consent of the copyright owner is unlawful Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc The purchaser may make back-up copies for his/her own use only and not for distribution or resale The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein .. .ACCRUAL ACCOUNTING CONCEPTS Accrual Accounting Concepts Explain the revenue recognition principle and the matching principle Differentiate between the cash basis and the accrual. .. accrual basis of accounting Explain why adjusting entries are needed and identify the major types of adjusting entries Prepare adjusting entries for prepayments Accrual Accounting Concepts ... Matching Principle Expense recorded only when incurred, not when cash paid 17 Accrual Basis adheres to •Generally •Accepted •Accounting •Principles 18 19 Types of Adjusting Entries Prepayments: