accounting

FASB

Financial Accounting Standards Board - has primary responsibility for developing accounting principles

accrual basis of accounting

revenues and expenses are reported on the income statement in the period in which a service has been performed or a product has been delivered; expenses are recorded when they are incurred, not necessarily when cash is paid. Cash may or may not be received during this period

the accrual basis of accounting

what does GAAP require?

cash basis of accounting

revenues and expenses are reported on the income statement in the period in which cash is received or paid; fees are recorded when cash is received from clients

net income

the difference between the cash receipts (revenues) and cash payments (expenses)

revenue recognition principle

revenues are recorded when they are earned, which is when services have been performed or products have been delivered to customers

revenue recognition

the process of recognizing revenues

expense recognition principle

the expenses incurred in generating revenue must be reported in the same period as the related revenue

matching principle

another name for the expense recognition principle

adjusting process

the analysis and updating of accounts at the end of the period before the financial statements are prepared

adjusting entries

the journal entries that bring the accounts up to date at the end of an accounting period

1 income statement account and 1 balance sheet account

all adjusting entries effect at least….

a revenue/expense account and an asset/liability account

an adjusting entry will always involve…..

accruals

occurs when revenue has been earned or an expense has been incurred but as not been recorded

deferral

occurs when cash related to a future revenue or expense has initially been recorded as a liability or an asset

unearned revenue

if the cash received is related to future revenue, it is initially recorded as a liability called…

prepaid expense

cash paid is related to a future expense, it initially recorded as an asset called…

accrued expense example

wages owed but not paid yet

prepaid expense example

supplies on hand

unearned revenue example

fees recieved but not yet earned

accrued revenue

fees earned but not yet received

adjusting entry for accrued revenue

debit asset (accounts receivable), credit a revenue account

adjusting entry for accrued expense

debit expense, credit liability