Financial Accounting -- The Accounting Cycle

Week 3

Revenue

recognised in the period in which goods and services are provided to customers, not necessarily in the period in which we receive cash

expenses

Any costs used to help generate revenues in the same period as those revenues

Revenue recognition on ACCRUAL basis

record rev when we provide g&s to customers

Expenses recognition on ACCRUAL basis

record expenses when costs are used in company operations

Revenue recognition on CASH basis

record rev when receive cash

Expenses recognition on CASH basis

record expenses when we pay cash

Adjusting entries are needed when:

• Cash flows or obligations occur BEFORE the revenue- or expense-related activity (prepayment), OR

• Cash flows occur AFTER the revenue- or expense-related activity (accrual

Adjusting entries are NOT needed when:

• Transactions that do not involve rev or expense activities

• Transactions that result in rev or expenses being recorded at the SAME TIME as the cash flow

if cash is paid in advance (asset created) and recognised before the service is provided (a prepaid expense), then an adjusting entry is required to

recognise the expense in the CURRENT period, i.e DECREASE asset to remaining amount and recognise EXPENSE

if cash is received in advance (liability created) and recognised before the service is provided (deferred revenue), then an adjusting entry is required to

recognise the expense in the CURRENT period, i.e DECREASE liability to remaining amount and recognise REVENUE

if cost is used in the current period (liability created) and recognised before it is paid for (accrued expense), then an adjusting entry is required to

increase liability for the amount to be paid and recognise expense. in a future period, the cash is paid for and the liability is settled

if service is provided in the current period (asset created) and recognised before it is paid for (accrued revenue), then an adjusting entry is required to

increase asset for amount to be received and recognise revenue. in a future period, the cash is received and asset reduced

when a company pays cash before incurring a cost, it expects to receive the benefits in the future: this creates 

an asset

in the period the costs are incurred for pre-paid expenses, an adjusting entry is needed to

decrease the asset to its remaining amount owed, and recognise expense

depreciable assets

value of asset decreases as time passes

deferred revenues arises when

a company receives cash in advance from customers, but goods and services won’t be provided until a later period

when a company receives cash before providing services to customers, it owes the customer a service in return: this creates 

a liability

in the period those services are provided, the liability is partially settled, and an adjusting entry is needed to:

decrease liability to its remaining amount owed and recognise revenue

accrued expenses occurs when

a company has used these costs to operate the company in the current period and hasn’t yet paid cash for those costs

for accrued expenses, an adjusting entry is needed to

record the liability to be paid, and recognise the cost as an expense

liability associated with the principal amount, i.e interest payable on a borrowed account, should NOT be credited, but

interest payable should be recorded on a separate account to keep the balance owed for principal separate from the balance owed for interest

calculating interest

principal x interest % x fraction of the year

accrued revenues occurs when

a company provided goods and services in the current period and has the right to receive payment

for accrued revenues, an adjusting entry is required to

record an asset for the amount expected to be received and recognise revenue

adjusted trial balance:

lists all account balances after updating them for adjusting entries and is prepared after posting the adjusting entries to the general ledger

closing entries help to

transfer balances of all temporary accounts (revenue, expenses, dividends) to the balance of the retained earnings accounts, and reduces the balances of these temp accounts to zero