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    This document discusses adjusting entries in accounting. It begins by explaining key concepts like the accrual basis of accounting and the time period assumption. The accrual basis matches revenues to expenses in the period earned rather than when cash is received. There are four major types of adjusting entries: 1) prepaid expenses 2) unearned revenues, which are expenses/revenues recorded in the wrong period, and 3) accrued revenues and 4) accrued expenses, which are revenues/expenses incurred but not yet recorded. Adjusting entries ensure expenses and revenues are recorded in the proper period.

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    This document discusses adjusting entries in accounting. It begins by explaining key concepts like the accrual basis of accounting and the time period assumption. The accrual basis matches revenues to expenses in the period earned rather than when cash is received. There are four major types of adjusting entries: 1) prepaid expenses 2) unearned revenues, which are expenses/revenues recorded in the wrong period, and 3) accrued revenues and 4) accrued expenses, which are revenues/expenses incurred but not yet recorded. Adjusting entries ensure expenses and revenues are recorded in the proper period.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Flag for inappropriate content
    9 views8 pages

    Adjusting Entry Slides

    Uploaded by

    Raushan Zhabagina
    This document discusses adjusting entries in accounting. It begins by explaining key concepts like the accrual basis of accounting and the time period assumption. The accrual basis matches revenues to expenses in the period earned rather than when cash is received. There are four major types of adjusting entries: 1) prepaid expenses 2) unearned revenues, which are expenses/revenues recorded in the wrong period, and 3) accrued revenues and 4) accrued expenses, which are revenues/expenses incurred but not yet recorded. Adjusting entries ensure expenses and revenues are recorded in the proper period.

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    © All Rights Reserved
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    of 8

    Chapter 3 Adjusting the Accounts

    Learning Objectives
    After studying this chapter, you should be able to:

    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.

    3-1
    Timing Issues

    Fiscal and Calendar Years


    ◆ Monthly and quarterly time periods are called interim
    periods.

    ◆ Public companies must prepare both quarterly and


    annual financial statements.

    ◆ Fiscal Year = Accounting time period that is one year in


    length.

    ◆ Calendar Year = January 1 to December 31.

    3-2 LO 1 Explain the time period assumption.


    Timing Issues

    Accrual- vs. Cash-Basis Accounting


    Cash-Basis Accounting
    ◆ Revenues recognized when cash is received.

    ◆ Expenses recognized when cash is paid.

    ◆ Cash-basis accounting is not in accordance with


    generally accepted accounting principles (GAAP).

    3-3 LO 2 Explain the accrual basis of accounting.


    Timing Issues

    Recognizing Revenues and Expenses


    Expense Recognition Principle
    Match expenses with
    revenues in the period when
    the company makes efforts to
    generate those revenues.

    “Let the expenses follow


    the revenues.”

    3-4 LO 2 Explain the accrual basis of accounting.


    Timing Issues
    Illustration 3-1
    GAAP relationships in revenue
    and expense recognition

    3-5 LO 2 Explain the accrual basis of accounting.


    The Basics of Adjusting Entries

    Prepaid Expenses
    Payment of cash, that is recorded as an asset because
    service or benefit will be received in the future.

    Cash Payment BEFORE Expense Recorded

    Prepayments often occur in regard to:


    ◆ insurance ◆ rent
    ◆ supplies ◆ equipment
    ◆ advertising ◆ buildings

    3-6 LO 5 Prepare adjusting entries for deferrals.


    The Basics of Adjusting Entries

    Unearned Revenues
    Receipt of cash that is recorded as a liability because the
    revenue has not been earned.

    Cash Receipt BEFORE Revenue Recorded

    Unearned revenues often occur in regard to:


    ◆ Rent ◆ Magazine subscriptions
    ◆ Airline tickets ◆ Customer deposits

    3-7 LO 5 Prepare adjusting entries for deferrals.


    The Basics of Adjusting Entries

    Types of Adjusting Entries


    Illustration 3-2
    Categories of adjusting entries

    Deferrals Accruals
    1. Prepaid Expenses. 3. Accrued Revenues.
    Expenses paid in cash and Revenues earned but not yet
    recorded as assets before received in cash or recorded.
    they are used or consumed.

    2. Unearned Revenues. 4. Accrued Expenses.


    Cash received and recorded Expenses incurred but not yet
    as liabilities before revenue is paid in cash or recorded.
    earned.

    3-8 LO 4 Identify the major types of adjusting entries.

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