CH3: ADJUSTING ACCOUNTS FOR FINANCIAL STATEMENTS

accural bases accounting

The approach to preparing financial statements that uses the adjusting process to recognize revenues when earned and expenses when incurred, not when cash is paid or received; the required approach for GAAP.

cash basis accounting

Revenues are recognized when cash is received, and expenses are recorded when cash is paid. This method ignores the matching principle and revenue recognition principle and is not acceptable under GAAP.

prepaid expenses

assets paid for in advance of receiving their benefits. when these assets are used, the advance payments become expenses

accumulated depreciation

a separate contra account

contra account

an account linked with another account. it has an opposite normal balance and is a subtraction from that other account’s balance

unearned revenue

cash received in advance of providing products and services. when cash is accepted, the company has a liability to provide products or services

accrued expense

costs incurred in a period that are both unpaid and unrecorded prior to adjustment. they are reported on the income statement for the period when incurred.

accrued interest expense

accrued salaries expense

salaries expense owed but not yet paid

accrued revenue

revenues earned in a period that are bot unrecorded and not yet received in cash

unadjusted trial balance

a list of ledger accounts and balances before adjustments are recorded

adjusted trial balance

a list of accounts and balances after adjusting entries have been recorded and posted to the ledger

preparing financial statements from adjusted trial balance

1. prepare income statement suing revenue and expense accounts from adjusted trial balance

2. prepare statement of owner’s equity using capital and withdrawals accounts from the trial balance; pull profit from step 1

3. prepare balance sheet using and liability form the trial balance; pull updated capital balance from step 2

the purpose of adjusting accounts at the end of a period

to recognize unrecorded revenues and expenses