Chapter 4

Cash System
Revenues are recognized when Cash is received
Expenses are reported when Cash is paid
Accrual System
Revenues are recognized when sales are made or
services are performed
Expenses are recognized when goods are used and
when services are received, whether or not cash is
paid
Accounting Adjustments
Help in achieve the goals of accrual accounting
Allocating revenues and expenses to appropriate
periods
 Adjustment Entries
Most entries to be made in the accounts are
transactions
Some events that affect the account are not evidenced
by documents as in transactions
The effect of these events are recorded at the end of
the accounting period by means of adjusting entries
 Steps
Analyse Transactions
Record transactions in the Journal
Posting in the Ledger
Prepare trial balance
Adjustments- Journalise, Post and prepare
adjusted trial balance.
Prepare Financial Statements
Journalise and Post Closing entries
Carry forward the balances in balance sheet to
next accounting period
 Adjusting Entries
Depreciation
Prepaid Expenses
Office Supplies
Revenues received in advance (unearned revenues)
Accrued Expenses (outstanding expenses)
Accrued Revenues (unbilled revenue)
Depreciation A/c dr.
Asset A/c

Depreciation A/c dr.

Accumulated depreciation, asset
Office Supplies
If first treated as asset, then at the end of the period
to record consumption
Office supplies expenses A/c dr
Office supplies
Prepaid Expense
Expense A/c dr
Prepaid expense
Unearned Revenue
Unearned Revenue A/c dr
Revenue from Services
Accrued Expenses
Expense A/c dr
Expense payable
Unbilled Revenue
Unbilled Revenue A/c dr
Revenue from Services
Income not yet received
Such as interest on deposits and Bills receivable

Interest Receivable
Interest income