Preview of Chapter 3 In Chapter 1, you learned a neat little formula: Net income = Revenues ~ Expenses. In Chapter 2, you learned some rules for recording revenue and expense transactions. Guess what? Things are not really that nice and neat. In fact, its often difficult for companies to determine in what time period they should report some revenues and expenses. In other words, in measuring net income, timing is everything. The content and organization of Chapter 3 are as follows. ere Se rae) ieee aco Scene ee es ‘= Types of adjusting entries * Preparing the adjusted trial balance is accounting + Adjusting entries for deferrals + Preparing financial statements jenues and expenses + Adjusting entries for accruals + Summary of journalizing and posting ESDESACEPISSIRGEME We would need no adjustments if we could wait to prepare financial state- Explain the time period ments until a company ended its operations. At that point, we could easily assumption. determine its final statement of financial position and the amount of life- time income it earned. a However, all companies find it desirable to report the results of their activities on a frequent basis. For example, management usually wants monthly financial statements, and taxing agencies require businesses to file annual tax returns. Therefore, accountants divide the economic life of a business into artificial time periods. This convenient assumption is referred to as the time period assumption. Many business transactions affect more than one of these arbitrary time peri- | ods. For example, the airplanes purchased by Cathay Pacific (HKG) five years ago are still in use today. We must determine the relevance of each business transaction | to specific accounting periods. (How much of an airplane’s original cost con- tributed to this period’s operations?) Fiscal and Calendar Years Both small and large companies prepare financial statements periodically in order to assess their financial condition and results of operations. Accounting time peri- ods are generally a month, a quarter, or a year. Monthly and quarterly time periods ENSTT RESALES 2 called interim periods. Most large companies must prepare both quarterly and UTA eekchay annual financial statements. The time period assump- An accounting time period that is one year in length is a fiscal year. A fiscal tion is also called the year usually begins with the first day of a month and ends twelve months later on. periodicity assumption. _the last day of a month. Most businesses use the calendar year (January 1 to December 31) as their accounting period. Some do not. Companies whose fiscal year differs from the calendar year include Vodafone Group (GBR), March 31, and Walt Disney Productions (USA), September 30. Sometimes a company’s year-end %