ADJUSTING THE ACCOUNTS handout

chap 3

Chapter 3-1 CHAPTER CHAPTER 3 3 ADJUSTING THE ADJUSTING THE ACCOUNTS ACCOUNTS Financial Accounting, Sixth Edition Chapter 3-2 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. Study Objectives Study Objectives Study Objectives Study Objectives Chapter 3-3 Adjusting the Accounts Adjusting the Accounts Adjusting the Accounts Adjusting the Accounts Timing Issues Timing Issues Timing Issues Timing Issues The Basics of The Basics of Adjusting Adjusting Entries Entries The Basics of The Basics of Adjusting Adjusting Entries Entries The Adjusted Trial The Adjusted Trial Balance and Balance and Financial Statements Financial Statements The Adjusted Trial The Adjusted Trial Balance and Balance and Financial Statements Financial Statements Time period Time period assumption assumption Fiscal and Fiscal and calendar years calendar years Accrual- vs. cash- Accrual- vs. cash- basis accounting basis accounting Recognizing Recognizing revenues and revenues and expenses expenses Types of adjusting Types of adjusting entries entries Adjusting entries Adjusting entries for deferrals for deferrals Adjusting entries Adjusting entries for accruals for accruals Summary of Summary of journalizing and journalizing and posting posting Preparing the Preparing the adjusted trial adjusted trial balance balance Preparing Preparing financial financial statements statements Chapter 3-4 Generally a month, a quarter, or a year. Fiscal year vs. calendar year Also known as the “Periodicity Assumption” Timing Issues Timing Issues Timing Issues Timing Issues Accountants divide the economic life of a business into artificial time periods (Time Period Assumption). LO 1 Explain the time period assumption. LO 1 Explain the time period assumption. Jan. Feb. Mar. Apr. Dec. . . . . . Chapter 3-5 The time period assumption states that: The time period assumption states that: a. a. revenue should be recognized in the accounting period in which it is earned. 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. Review Review Timing Issues Timing Issues Timing Issues Timing Issues LO 1 Explain the time period assumption. LO 1 Explain the time period assumption. Chapter 3-6 Accrual-Basis Accounting Transactions recorded in the periods in which the events occur Revenues are recognized when earned, rather than when cash is received. Expenses are recognized when incurred, rather than when paid. Timing Issues Timing Issues Timing Issues Timing Issues Accrual- vs. Cash-Basis Accounting LO 2 Explain the accrual basis of accounting. LO 2 Explain the accrual basis of accounting. Chapter 3-7 Cash-Basis Accounting Revenues are recognized when cash is received. Expenses are recognized when cash is paid. Cash-basis accounting is not in accordance with generally accepted accounting principles (GAAP). Timing Issues Timing Issues Timing Issues Timing Issues Accrual- vs. Cash-Basis Accounting LO 2 Explain the accrual basis of accounting. LO 2 Explain the accrual basis of accounting. Chapter 3-8 Revenue Recognition Principle Timing Issues Timing Issues Timing Issues Timing Issues Recognizing Revenues and Expenses LO 2 Explain the accrual basis of accounting. LO 2 Explain the accrual basis of accounting. Companies recognize revenue in the accounting period in which it is earned. In a service enterprise, revenue is considered to be earned at the time the service is performed. Chapter 3-9 Matching Principle Timing Issues Timing Issues Timing Issues Timing Issues Recognizing Revenues and Expenses LO 2 Explain the accrual basis of accounting. LO 2 Explain the accrual basis of accounting. Match expenses with revenues in the period when the company makes efforts to generate those revenues. “Let the expenses follow the revenues.” Chapter 3-10 Timing Issues Timing Issues Timing Issues Timing Issues LO 2 Explain the accrual basis of accounting. LO 2 Explain the accrual basis of accounting. GAAP relationships in revenue and expense recognition GAAP relationships in revenue and expense recognition Illustration 3-1 Illustration 3-1 . Chapter 3- 1 CHAPTER CHAPTER 3 3 ADJUSTING THE ADJUSTING THE ACCOUNTS ACCOUNTS Financial Accounting, Sixth Edition Chapter 3- 2 1. Explain. often occur in regard to: building building purchases purchases equipment equipment purchases purchases Chapter 3- 19 Prepaid Expenses Costs that expire either