ACCT 2301 Chapter 3

Fiscal Year

accounting time period that is one year in length

Accrual- Basis Accounting

1. transactions recorded in the periods in which the events occur

2. companies recognize revenues when they perform services (rather than when they receive cash)

3, expenses are recognized when incurred (rather than when paid)

4. GAAP

Cash- Basis Accounting

1. transactions are recorded in the period that cash is received or paid

2. revenues are recorded when cash is received

3. expenses are recored when cash is paid

4. not GAAP

Revenue Recognition Principle

recognized when the performance obligation is satisfied

Expense Recognition Principle

match expenses with revenues in the period when the company makes efforts to generate those revenues

The Need for Adjusting Entries

1. ensure that the revenue recognition and expense recognition principles are followed

2. necessary because the trial balance may not contain up-to-date and complete data

3. required every time a company prepares financial statements

4. will include one income statement account and one balance sheet account

Deferrals

revenues or expenses recognized after receiving cash

Accurals

revenues for services performed, but not yet recorded (because not billed). Expenses incurred, but not yet recorded (because haven't received a bill)

Types of Adjusting Entries (Deferrals)

Prepaid expenses

Unearned revenues

Types of Adjusting Entries (Accruals)

Accrued revenues

Accrued expenses

Prepaid Expenses

expenses paid in cash before they are used or consumed

Unearned Revenues

cash received before services are performed

Accrued Revenues

revenues for services performed but not yet received in cash or recorded

Accrued Expenses

expenses incurred but not yet paid in cash or recorded

The Recording Process

1. analyze each transaction for its effects on the accounts

2. journalize the transactions in the general journal

3. post the transactions to the ledger

4. prepare a trial balance

5. journalize the adjusting entries in the general journal

6. post the adjusting entries to the ledger

7. prepare an adjusted trial balance

8. prepare financial statements

Depreciation defined

the process of allocating the cost of an asset to an expense over its useful life

Accumulated Depreciation

a contra asset account (have increases, decreases, and normal balances opposite to the account to which they relate)

Interest Formula

face value of note X annual interest rate X time in terms of one year = interest