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123 4E CH 04 Edit
123 4E CH 04 Edit
ACCRUAL ACCOUNTING
CONCEPTS
4-1
Accounting, Fourth Edition
Accrual
Accrual Accounting
Accounting Concepts
Concepts
The Adjusted
The Basics of
Trial Balance Closing the Quality of
Timing Issues Adjusting
and Financial Books Earnings
Entries
Statements
Companies recognize
revenue in the accounting
period in which it is earned.
In a service enterprise,
revenue is considered to be
earned at the time the
service is performed.
4-9
SO 2 Differentiate between the cash basis
and the accrual basis of accounting.
Timing
Timing Issues
Issues
4-10
SO 2 Differentiate between the cash basis
and the accrual basis of accounting.
4-11
The
The Basics
Basics of
of Adjusting
Adjusting Entries
Entries
4-12
SO 3 Explain why adjusting entries are needed, and
identify the major types of adjusting entries
The
The Basics
Basics of
of Adjusting
Adjusting Entries
Entries
4-13
SO 3 Explain why adjusting entries are needed, and
identify the major types of adjusting entries
Types
Types of
of Adjusting
Adjusting Entries
Entries
Illustration 4-3
Categories of adjusting entries
Deferrals:
1. Prepaid expenses: Expenses paid in cash
and recorded as assets before they are used or
consumed.
2. Unearned revenues: Cash received and
reported as liabilities before revenue is earned.
Accruals:
1. Accrued revenues: Revenues earned but
not yet received in cash or recorded.
2. Accrued expenses: Expenses incurred
but not yet paid in cash or recorded.
4-14
SO 3 Explain why adjusting entries are needed, and
identify the major types of adjusting entries
Types
Types of
of Adjusting
Adjusting Entries
Entries
Trial Balance –
Each account is
analyzed to
determine
whether it is
complete and up-
to-date.
Illustration 4-4
4-15
SO 3 Explain why adjusting entries are needed, and
identify the major types of adjusting entries
Adjusting
Adjusting Entries
Entries for
for Deferrals
Deferrals
Prepaid expenses
OR
Unearned revenues.
Prepaid Expenses
Costs that expire either with the passage of time or
through use.
Depreciation
Buildings, equipment, and motor vehicles (long-lived
assets) are recorded as assets, rather than an
expense, in the year acquired.
Statement Presentation
Accumulated Depreciation-Equipment is a contra asset
account.
Unearned Revenues
Adjusting entry to record the revenue that has been
earned and to show the liability that remains.
Summary
Illustration 4-13
Made to record:
Revenues earned and
OR
Expenses incurred
Accrued Revenues
Illustration 4-15
Summary
Illustration 4-16
rent taxes
interest salaries
Accrued Expenses
Summary
Illustration 4-22
4-46 SO 6 Describe the nature and purpose of the adjusted trial balance.
The
The Adjusted
Adjusted Trial
Trial Balance
Balance
4-47 SO 6
Preparing
Preparing Financial
Financial Statements
Statements
Financial
Financialstatements
statements are
are prepared
prepareddirectly
directly from
from the
the
Adjusted
AdjustedTrial
Trial Balance.
Balance.
Retained
Income Balance
Earnings
Statement Sheet
Statement
4-48 SO 6 Describe the nature and purpose of the adjusted trial balance.
Preparing
Preparing Financial
Financial Statements
Statements
Illustration 4-27
4-49
Preparing
Preparing Financial
Financial Statements
Statements
Illustration 4-28
4-50
Closing
Closing the
the Books
Books
2012
Illustration 4-31
4-53
Closing
Closing the
the Books
Books
7. Prepare financial
4. Prepare a trial balance
statements
Illustration 4-27
4-58
SO 9 Understand the causes of differences between net
income and cash provided by operating activities.