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 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 Basis Accounting

Economic Transactions are recorded in the period inn which the events occur. Basis Accounting

Revenue is recorded when cash is received. 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) Recognition Principle

Revenue is recognized when the services are performed or the merchandise (goods) are shipped – regardless as to when payment is received. 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.

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 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

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 at that point in time.

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 Supplies

Depreciation is the allocation of the of an 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 Income and Statement of Retained Earnings