Going Concern Concept
Corporations are established for an indefinite
Period of time.
Time Period Assumption
We divide the economic life of the corporation into artificial time periods
Time Periods
Fiscal year – an accounting period which is one year in length. Can be a calendar year or any twelve month period.
Time Periods
Interim Periods – any time period less than one year in duration.
Quarter – four months
Month
Accrual Basis Accounting
Economic Transactions are recorded in the period inn which the events occur.
Cash Basis Accounting
Revenue is recorded when cash is received.
Expenses are recorded when money is spent.
Accrual vs. Cash Basis Accounting
Accrual Basis accounting follows generally accepted accounting principles (GAAP)
Cash Basis accounting does not follow generally accepted accounting principles (GAAP)
Revenue Recognition Principle
Revenue is recognized when the services are performed or the merchandise (goods) are shipped – regardless as to when payment is received.
Expense Recognition Principle
Expenses are recognized when the service is received or when we take possession of the merchandise (goods) – regardless as to whether we pay for them now or later.
Matching Principle
All the revenue earned in a given time period must be recorded in that time period AND all the expenses necessary to generate that revenue must be recorded in that same time period.
Adjusting Entries
Adjusting entries are required to ensure that the Matching Rule is being followed.
Adjusting Entries
Adjusting entries are required every time a company prepares financial statements.
Types of Adjusting Entries
Accruals
The transactions have been recorded in the time period, but the value must be adjusted do that the balance reflects the proper or actual value of the account at that point in time.
Deferrals
The value of the revenue earned or expense incurred is not recorded in the time period so must be brought into that time period.
The starting point for adjustments
Deferrals
Deferrals are either prepaid expenses or unearned revenues
Supplies
Insurance
Depreciation
Depreciation is the allocation of the cost of an asset over a period of time. That period of time is called its useful life.
Depreciation
Asset CostSalvage ValueDepreciable CostDivided by the
useful life
$250,00050,000
200,000
10 years
Equals annual depreciation expense of $20,000
Adjustment to record Depreciation Expense
Debit Credit
Depreciation Expense 20,000
Accumulated Depreciation -
Equipment 20,000
Unearned Revenues
To Adjust Unearned Revenues
Adjusting for accrued revenues
Adjusting for Accrued Revenues
Adjusting for Accrued Expenses
Adjusting for Accrued Interest
Adjusting for Accrued Salaries
Journalizing the adjusting entries
Posting the Adjusting Entries
The Adjusted Trial Balance
Income and Statement of Retained Earnings
Balance Sheet