Chapter 3 Notes
Chapter 3 Notes Financial Accounting
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This 2 page Class Notes was uploaded by Jayne Johnston on Sunday February 7, 2016. The Class Notes belongs to Financial Accounting at a university taught by Raqule Crawley in Spring 2016. Since its upload, it has received 11 views.
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Date Created: 02/07/16
Chapter 3 – Adjusting Our Accounts The Accounting Period Quarterly, Monthly, Semiannually, Annually Accrual Basis versus Cash Basis Accrual Basis – revenues are recognized when earned and expenses are recognized when incurred. Cash Basis (NON-GAAP) – revenues are recognized when cash is received and expenses are recorded when cash is paid. Recognizing Expenses The revenue recognition principle states that we recognize revenue when the product/service is delivered to our customer. The expense recognition (or matching) principle aims to record expenses in the same accounting period as the revenues that are earned as a result of those expenses. This matching of expenses with the revenue benefits is a major part of the adjusting process. Framework for Adjustments An adjusting entry is made at the end of an accounting period to reflect a transaction or event that is not yet recorded. 3 steps to follow Know what your beginning balance and what account needs adjusting. Know what the ending balance should be. Writing the journal entry to make it happen. Depreciation Instead of expensing the cost of a plant asset (equipment, building, etc.) in the year it is purchased we allocate or spread out the cost over their expected useful lives. Straight-line depreciation S-L Depreciation Expense = (Asset cost – Salvage value) / Useful life Useful life – period of time that an asset is expected to help produce revenues. Salvage value – expected market value or selling price of an asset at the end of its useful life. Preparing Financial Statements from an Adjusted Trial Balance Step 1 – Prepare income statement using revenue and expense accounts from trial balance. Step 2 – Prepare statement of retained earnings using retained earnings and dividends from trial balance; and pull net income from step 1. Step 3 – Prepare balance sheet using asset and liability account from trial balance; and pull updated retained earnings balance from step 2. Chapter 3 – Adjusting Our Accounts Step 4 – Prepare statement of cash flows from changes in cash flows for the period. Recording Closing Entries Close credit balances in revenue accounts to income summary. Close debit balances in expense accounts to income summary. Close dividends to retained earnings. Post-Closing Trial Balance List of permanent accounts and their balances after posting closing entries. Total debits and credits must be equal. Accounting Cycle Profit Margin Profit margin ratio measures the company’s net income to net sales. Profit margin = Net income / Net sales Current Ratio Helps assess the company’s ability to pay its debts in the near future. Current ratio = Current assets / Current liabilities
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