ACCTG 211: Week 3 Notes
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This 3 page Class Notes was uploaded by Alicia Polcha on Wednesday January 27, 2016. The Class Notes belongs to 211 at a university taught by Prof. Herrick in Spring 2016. Since its upload, it has received 10 views.
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Date Created: 01/27/16
Chapter 3: Accouting Week 3 1. Exam moved to Monday, February 8, 2016 2. Adjusting The Accounts a. Timing issues i. Time Period Assumption 1. Accountants divide the economic life of a business into artificial time periods 2. Generally a month, a quarter, or a year 3. Also known as “Periodicity Assumption” ii. Fiscal and Calendar Years 1. Interim Periods a. Montly and quarterly time periods 2. Public companies must prepare both quarterly and annual financial statements 3. Fiscal Year a. Accounting time period that is one year in length 4. Calendar Year a. January 1 December 31 b. Accrual vs CashBasis Accounting 1. Cash Basis Accounting a. Revenues get recognized when cash is received b. Expenses are recognized when cash is paid c. CashBasis accounting is not in accordance with generally accerpted accounting principles (GAAP) ii. Recognizing Revenues and Expenses 1. Revenue Recognition Principle a. Companies recognize revenue in the accounting period which it is earned (Performance obligation satisfied) i. Ex. Customer requests service in June, work is done in July, and work is paid for in August ii. In order for Revenue Recognition to exist: 1. Product/ service has been provided 2. Arrangement exists between the buyer and seller 3. Price is known 4. Collection is reasonably assured b. In a service enterprise, revenue is considered to be earned at the time the service is performed 2. Matching Principle a. Also known as Expense Recognition Principle b. Matches expenses with reveneues in the period when the company makes efforts to generate those revenues c. You should try to match the revenue you are reporting with the expenses it took to generate that revenue in any ONE given accounting period d. Ex. Buying a toaster from Walmart i. Walmart buys toaster in September for $30 1. Inventory (asset) ii. Sells in February for $40 1. Asset gets consumes and becomes an expense (cost of goods sold) c. Types of Adjusting Entries i. Deferrals 1. Prepaid Expenses: a. Expenses paid in cash and recorded as assets before they are used or consumed b. Unearned Revenues: i. Cash received before revenue is earned ii. Accruals: 1. Accrued Revenues: a. Revenues earned byt not yet received in cash or recorded 2. Accrued Expenses: a. Expenses incurred but not yet paid in cash or recorded d. Trial Balance: i. Each account is analyzed to determine whether it is complete and uptodate e. Adjusting Entries for Prepaid Expenses i. Payment of cash that is recorded as an asset because service or benefit will be received in the future ii. Cash Payment BEFORE Expense Recorded iii. Prepayments often occur in regard to: a. Insurance b. Supplies c. Advertising d. Rent e. Equipment f. Buildings iv. Increases (debits) and expense account and decreases (credits) an asset account v. Depreciation 1. The process of allocating the cost of and asset to expense over its useful life. Companies report a portion of the cost of the asset as an expense (depreciation expense) a. Buildings, equipment, and vehicles (assets with long lives) are recorded as assets, rather than an expense in the year acquired vi. Depreciation (Statement Presentation) a. Accumulated depreciation is a contra asset account b. Offsets a related asset account on the balance sheet vii. Accounting for Prepaid Expenses 1. Examples a. Insurance, supplies, advertising, rent , depreciation b. Reason for Adjustment i. Prepaid expenses recorded in assets accounts have been used viii. Receipt of cash that is recorded as a liability because the revenue has not yet been earned 1. Unearned Revenues often occur in regard to: a. Rent, airline tickets, school tuition, magazine subscriptions, customer deposits KNOW FOR EXAM! DEBIT CREDIT Assets, drawings, expenses Increase Decrease Liabilities, capital, revenue Decrease Increase
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