ACT 205 Lecture and Learn Smart Notes
ACT 205 Lecture and Learn Smart Notes ACT 205
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This 6 page Class Notes was uploaded by Rachel Rheingold on Friday September 16, 2016. The Class Notes belongs to ACT 205 at Colorado State University taught by Sally Plasterer Whitney in Fall 2016. Since its upload, it has received 16 views.
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Date Created: 09/16/16
Ch. 3 The Accounting Cycle The Accounting Period The income statement reports a firm’s revenues and expenses for a certain period in time Financial statements are put together at the end of a time period o Monthly o Quarterly o Yearly The 12-month accounting period is used by a company o That’s the fiscal year Some use a 12-month period as their fiscal year Revenue Recognition Principle Chris books a cruise. he makes and pays for the reservation in October 2013 but the cruise isn’t until February 2014 When does the cruise line report the revenue from Chris’s ticket? o In February when he takes the cruise The revenue recognition principle says o That you record in the period of time in which the good and services a customer bought are provided to them NOT when payment is received The Matching Principle Most expenses are recorded in the same period as the revenues they help make Other expenses indirectly related to producing revenues are recorded in the period in which they happen Expense Recognition Expenses indirectly related to providing revenue are reported in the period they occur o Those are called period costs Accrual-Basis vs. Cash-Basis Point of Accruel- Basis Cash-Basis Difference Revenue When goods and When cash is Recognition services are received provided to customers Expense In the period costs When cash is paid Recognition are used to help produce revenues GAAP Part of GAAP Not part of the GAAP Types of Adjusting Entries Some transactions have occurred during the period but have not been recorded by the end of the period Often included activities like o Using supplies o Earning interest o Rent expiring 4 types o payments/deferrals 2 prepaid expense pay cash to purchase an asset in the current period that will be recorded as an expense in the future deferred revenues receive cash in the current period that will be recorded as a revenue in the future o Accruals Accrued expenses Record an expense in the current period that will be paid in cash in the future Accrued revenues Record a revenue in the current period that will be collected in cash in a future period Prepaid Expense Prepaid expenses are the costs of assets obtained in one period of that will be recorded as an expense in a future period Costs are initially recorded as assets because they provide future benefits We expense these costs in future periods as the assets are used Adjusting entry: debit an expense account and credit an asset account 3 Deferred Revenue Deferred revenues occur when a company receives cash in advance from customers Cash received is initially recorded as a liability because there is a commitment to a customer Once the commitment is met, revenue can be recorded (revenue recognition principle) Adjusting entry: debit a liability account and credit a revenue account Accrued Expenses Accrued expenses are recorded when a company has a cost that is used to help generate revenue but hasn’t yet paid cash for that cost Cost is recorded as an expense and the amount owed is recorded as a liability Adjusting entry: debit an expense account and credit a liability account Accrued Revenues When a companies provides products or services to customers but hast yet received a cash payment Adjusting entry: debit as asset account and credit a revenue account The Adjusted Trial Balance After all the adjusting journals have been recorded and posted 4 o The firm recalculates the trial balances in the ledger T accounts for accuracy The adjusted trial balance is used to prove the equity of the total debit balances and total credit balances Using the adjusted trial balance, a firm can no prepare their financial statements Statement of Cash Flows Measures activities involving cash Reflects a company’s operating, investing and financing activities The Closing Process The income statement reports revenues and expenses incurred over a period of time Dividends are reported in the statement of stockholder’s equity o These account must start the beginning of each new period it starts with a balance of zero Revenue, expense, and dividend account are temporary accounts Asset, liability, and stockholder equity are permanent accounts Closing Entries To transfer the balances of temp accounts to the balance of retained earnings o They should have the same ending number 5 Post-Closing Trial Balance Lists all account balances after updating the closing entries Helps make sure everything is in balance before starting a new period The Accounting Cycle Chapter 2 o Analyze transactions o Record transactions in a journal entry form o Post the journal to a general ledger o Prepare an initial trial balance Chapter 3 o Record and post adjusting journal entries o Prepare an adjusted trial balance o Prepare the financial statements o Record and post-closing journal entries o Prepare a post-closing trial balance 6
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