What are Types of Adjusting Entries?
- Deferrals
a) Prepaid Expenses
b) Unearned Revenues - Accruals
a) Accrued Revenues
b) Accrued Expenses
What are Prepaid Expenses?
Payment of cash, that is recorded as an asset because service or benefit will be received in the future.
Cash before Expense
debit expense & credit asset
What are Unearned Revenues?
Receipt of cash that is recorded as a liability because service has not be performed.
Cash before revenue
debit liability & credit revenue
What are Accrued Revenues?
Revenues for services performed but not yet received in cash or recorded.
Revenue before cash
debit asset & credit revenue
What are Accrued Expenses?
Expenses incurred but not yet paid in cash or recorded.
Expense before Cash
debit expense & credit liability
Explain the time period assumption (Periodicity Assumption).
Accountants divide the economic life of a business into artificial time periods.
Generally a month, a quarter, or a year.
What is the difference between interim period, calendar and fiscal year?
Monthly and quarterly time periods are called interim periods.
Fiscal Year = Accounting time period that is one year in length
Calendar Year = January 1 to December 31
What are the interim periods for financial statements in the EU and the US?
EU: half year and annual
US: quarterly and annual
Characteristics of Accrual-Basis Accounting
Transactions recorded in the periods in which the events occur.
Revenues are recognized when the services are performed, rather than when cash is received.
Expenses are recognized when incurred, rather than when paid.
Characteristics of Cash-Basis Accounting
Revenues recognized when cash is received.
Expenses recognized when cash is paid.
Cash-basis accounting is not in accordance with International Financial Reporting Standards (IFRS).
What is the Revenue Recognition Principle?
What does it mean for service enterprises?
Recognize revenue in the accounting period in which the performance obligation is satisfied.
In a service enterprise, revenue is considered to be earned at the time the service is performed.
What is the Expense Recognition Principle?
Match expenses with revenues in the period when the company makes efforts to generate those revenues.
What is the Book value?
Book value is the difference between the cost of any depreciable asset and its accumulated depreciation.
Purpose of the Adjusted Trial Balance
Purpose is to prove the equality of debit balances and credit balances in the ledger.
