Going Concern Concept

Corporations are established for an indefinite

Period of time.

Time Period Assumption

We divide the economic life of the corporation into artificial time periods

Time Periods

Fiscal year – an accounting period which is one year in length. Can be a calendar year or any twelve month period.

Time Periods

Interim Periods – any time period less than one year in duration.

Quarter – four months

Month

Accrual Basis Accounting

Economic Transactions are recorded in the period inn which the events occur.

Cash Basis Accounting

Revenue is recorded when cash is received.

Expenses are recorded when money is spent.

Accrual vs. Cash Basis Accounting

Accrual Basis accounting follows generally accepted accounting principles (GAAP)

Cash Basis accounting does not follow generally accepted accounting principles (GAAP)

Revenue Recognition Principle

Revenue is recognized when the services are performed or the merchandise (goods) are shipped – regardless as to when payment is received.

Expense Recognition Principle

Expenses are recognized when the service is received or when we take possession of the merchandise (goods) – regardless as to whether we pay for them now or later.

Matching Principle

All the revenue earned in a given time period must be recorded in that time period AND all the expenses necessary to generate that revenue must be recorded in that same time period.

Adjusting Entries

Adjusting entries are required to ensure that the Matching Rule is being followed.

Adjusting Entries

Adjusting entries are required every time a company prepares financial statements.

Types of Adjusting Entries

Accruals

The transactions have been recorded in the time period, but the value must be adjusted do that the balance reflects the proper or actual value of the account at that point in time.

Deferrals

The value of the revenue earned or expense incurred is not recorded in the time period so must be brought into that time period.

The starting point for adjustments

Deferrals

Deferrals are either prepaid expenses or unearned revenues

Supplies

Insurance

Depreciation

Depreciation is the allocation of the cost of an asset over a period of time. That period of time is called its useful life.

Depreciation

Asset CostSalvage ValueDepreciable CostDivided by the

useful life

$250,00050,000

200,000

10 years

Equals annual depreciation expense of $20,000

Adjustment to record Depreciation Expense

Debit Credit

Depreciation Expense 20,000

Accumulated Depreciation -

Equipment 20,000

Unearned Revenues

To Adjust Unearned Revenues

Adjusting for accrued revenues

Adjusting for Accrued Revenues

Adjusting for Accrued Expenses

Adjusting for Accrued Interest

Adjusting for Accrued Salaries

Journalizing the adjusting entries

Posting the Adjusting Entries

The Adjusted Trial Balance

Income and Statement of Retained Earnings

Balance Sheet