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 Cost $250,000 Salvage Value 50,000 Depreciable Cost 200,000 Divided by the useful life 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