Mgmt 200 Purdue chapter 3

Cash basis accounting

revenue is recorded only when cash is received, expenses are recorded only when cash is paid

Cash basis is

often used by small businesses, not GAAP

accrual basis accounting

revenue is recorded when earned, expenses are recorded when incurred

time period concept assumes

business's activities can be sliced into small time segments and that financial statement can be prepared for specific periods, such as a month, quarter, or year

the revenue recognition principle requires

companies to record revenue when it has been earned and deteremineds the amount of revenue to record

the matching principle guides accounting for expenses and ensures that

all expenses are recorded when they are incurred during the period, it then matches those expenses against the revenues of the period

adjusting entries are

completed at the end of the accounting period and record revenues to the period in which they are earned and expenses to the period in which they occur

adjusting entries also update

the asset and liability accounts

four types of adjusting entries are:

prepaid expenses: advance payment of future expenses adjusted for amount used

unearned revenues: advance receipt of future revenues adjusted for amount earned

accrued expenses: expenses that have been incurred but not paid

accrued revenues: revenues that have been earned but not collected

whats the purpose of adjusted trial balance and how do we prepare it?

it ensures that total debits equal total credits

what is an adjusted trial balance

It is a list of all accounts with their adjusted balance

The impact of adjusting entries on financial statements

if adjusting entries are unrecorded, balance sheet and incomes statements will be overstated or understated, causes financial statements to be incorret

How could a worksheet help in preparing adjusting entries and adjusted trial balance

a worksheet helps summarize data to prepare for financial statements

What is a worksheet

an internal document that helps identify the accounts that need adjustments

whats an alternative treatment of unearned revenues

unearned revenues can be recorded to a revenue account at the time of cash receipt, the adjusting entry would transfer any remaining liability to the liability account, unearned revenue

whats an alternative treatment of recording prepaid expenses

prepaid expenses can be recorded to an expense account at the time oo payment. the adjusting entry would transfer any remaining prepayment to the asset account, prepaid expenses.