Financial Accounting CHPT 3

Cash-Basis Accounting

only record transactions at the time cash is received or paid

Accrual-Basis Accounting

economic events that affect assets, liabilities, revenues, and expenses are recorded as they happen

Timing

The difference between the accountings when those revenues and expenses are recorded

Accrual-Basis Accounting is

part of GAAP

Adjusting Entries

update balances of assets and liabilities at the end of the accounting period

an expense

For prepaid expense, debit is to

asset or contra account

For prepaid expense, credit is to

Prepaid Expenses

when a company pays cash (or obligation to pay cash) to acquire an asset that is not used until a later period

adjusting entry

1. decrease the asset’s balance to its remaining (unused) amount

2. recognize an expense for the cost of asset used

Deferred Revenues

when a company receives cash in advance before providing goods/services in a later period

Accured Expense

when a company receives costs in the period, but the company hasn’t yet paid cash for those cost

Accured Revenues

when a company provides products/services but hasn’t yet received cash

Needed

Adjusting entries

1. when cashflows or obligations occur before the revenue or expense-related activity

2. when cashflows occur after the revenue or expense related activity (accrual)

unnecessary

adjusting entries

1. for transactions that don’t involve revenue or expense activities

2. for transactions that result in revenues or expenses being recorded at the same time as the cash flow

Adjusted Trial Balance

lists all account balances after updating them for adjusting entries

Closing Entries

transfer the balances of all temporary accounts to the balance of the retained earnings account

Temporary Accounts

Revenues, expenses, and dividends

Post-Closing Trial Balance

a list of all accounts and their balances at a particular date after we have updated account balances for closing entries