Adjusting entries ppt

adjusting entries powerpoint presentation and adjusting entries in accounting ppt
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Dr.DouglasPatton,United States,Teacher
Published Date:26-07-2017
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CHAPTER 3 ADJUSTING THE ACCOUNTS www.ThesisScientist.comTIME PERIOD ASSUMPTION  The time period (or periodicity) assumption assumes that the economic life of a business can be divided into artificial time periods — generally a month, a quarter, or a year.  Periods of less than one year are called interim periods.  The accounting time period of one year in length is usually known as a fiscal year. www.ThesisScientist.comREVENUE RECOGNITION PRINCIPLE  The revenue recognition principle states that revenue should be recognized in the accounting period in which it is earned.  In a service business, revenue is usually considered to be earned at the time the service is performed.  In a merchandising business, revenue is usually earned at the time the goods are delivered. www.ThesisScientist.comTHE MATCHING PRINCIPLE  The practice of expense recognition is referred to as the matching principle.  The matching principle dictates that efforts (expenses) be matched with accomplishments (revenues). Revenues expenses are offset earned incurred in against.... this month earning the revenue www.ThesisScientist.comACCRUAL BASIS OF ACCOUNTING Adheres to the Revenue recognition principle Matching principle Revenue recorded when earned, not only when cash received. Expense recorded when services or goods are used or consumed in the generation of revenue, not only when cash paid. www.ThesisScientist.comCASH BASIS OF ACCOUNTING Revenue recorded only when cash received. Expense recorded only when cash paid.ADJUSTING ENTRIES  Adjusting entries make the revenue recognition and matching principles HAPPEN www.ThesisScientist.comILLUSTRATION 3-3 TRIAL BALANCE Pioneer Advertising Agency Trial Balance October 31, 2002 Debit Credit Cash 15,200 Advertising Supplies 2,500 Prepaid Insurance The Trial Balance 600 Office Equipment 5,000 is analysed to Notes Payable 5 ,000 determine the Accounts Payable 2,500 Unearned Revenue 1,200 need for adjusting C.R. Byrd, Capital 1 0,000 entries. C.R. Byrd, Drawings 500 Service Revenue 1 0,000 Salaries Expense 4,000 Rent Expense 900 28,700 28,700 www.ThesisScientist.comADJUSTING ENTRIES  Adjusting entries are required each time financial statements are prepared.  Adjusting entries can be classified as 1. prepayments (prepaid expenses or unearned revenues), 2. accruals (accrued revenues or accrued expenses), or 3. estimates (amortization). www.ThesisScientist.comTYPES OF ADJUSTING ENTRIES Prepayments 1. Prepaid Expenses — Expenses paid in cash and recorded as assets before they are used or consumed. 2. Unearned Revenues — Revenues received in cash and recorded as liabilities before they are earned. www.ThesisScientist.comTYPES OF ADJUSTING ENTRIES Accruals 1. Accrued Revenues — Revenues earned but not yet received in cash or recorded. 2. Accrued Expenses — Expenses incurred but not yet paid in cash or recorded. www.ThesisScientist.comTYPES OF ADJUSTING ENTRIES Estimates 1. Amortization — Allocation of the cost of capital assets to expense over their useful lives. www.ThesisScientist.comPREPAYMENTS  Prepayments are either prepaid expenses or unearned revenues.  Adjusting entries for prepayments are required to record the portion of the prepayment that represents 1. the expense incurred or, 2. the revenue earned in the current accounting period. www.ThesisScientist.comPREPAID EXPENSES  Prepaid expenses are expenses paid in cash and recorded as assets before they are used or consumed.  Prepaid expenses expire with the passage of time or through use and consumption.  An asset-expense account relationship exists with prepaid expenses. www.ThesisScientist.comPREPAID EXPENSES  Prior to adjustment, assets are overstated and expenses are understated.  The adjusting entry results in a debit to an expense account and a credit to an asset account.  Examples of prepaid expenses include supplies, rent, insurance, and property tax. www.ThesisScientist.comUNEARNED REVENUES  Unearned revenues are revenues received and recorded as liabilities before they are earned.  Unearned revenues are subsequently earned by performing a service or providing a good to a customer.  A liability-revenue account relationship exists with unearned revenues. www.ThesisScientist.comUNEARNED REVENUES  Prior to adjustment, liabilities are overstated and revenues are understated.  The adjusting entry results in a debit to a liability account and a credit to a revenue account.  Examples of unearned revenues include rent, magazine subscriptions, airplane tickets, and tuition. www.ThesisScientist.comILLUSTRATION 3-4 ADJUSTING ENTRIES FOR PREPAYMENTS Adjusting Entries Prepaid Expenses Asset Expense Unadjusted Credit Debit Balance Adjusting Adjusting Entry (-) Entry (+) Unearned Revenues Liability Revenue Debit Unadjusted Credit Adjusting Balance Adjusting Entry (-) Entry (+) www.ThesisScientist.comACCRUALS  A different type of adjusting entry is accruals.  Adjusting entries for accruals are required to record revenues earned and expenses incurred in the current period.  The adjusting entry for accruals will increase both a balance sheet and an income statement account. www.ThesisScientist.comACCRUED REVENUES  Accrued revenues may accumulate with the passing of time or through services performed but not billed or collected.  An asset-revenue account relationship exists with accrued revenues.  Prior to adjustment, assets and revenues are understated.  The adjusting entry requires a debit to an asset account and a credit to a revenue account.  Examples of accrued revenues include accounts receivable, rent receivable, and interest receivable.

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