Textbook Chapter 4 Notes
Textbook Chapter 4 Notes ACCT201A
Cal State Fullerton
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This 4 page Class Notes was uploaded by Tiffany Notetaker on Monday September 28, 2015. The Class Notes belongs to ACCT201A at California State University - Fullerton taught by Glen Hatton in Summer 2015. Since its upload, it has received 33 views. For similar materials see Financial Accounting in Accounting at California State University - Fullerton.
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Date Created: 09/28/15
Chapter 4 Accrual Accounting Concepts Saturday September 12 2015 1237 PM A Timing Issues a Periodicity Assumption accounting divides the economic life of a business into artificial time periods generally a month quarter or year b Revenue recognition principle requires that companies recognize revenue in the accounting period in which the performance obligation when a company agrees to perform a service or sell a product to a customer is satisfied c Expense recognition matching principle dictates that efforts expenses be matched with results revenues Fe eadl titf human IEeenemlie Ilife elf hueiine eeni he derided linte er dl lme elude Revenue l eeelgnitm Expense Hemgnitierm Principllre lPrimItiple Eleverme we in the d em with rm eeumting peIri ill l whieh in the periledl the ue penfenmenree lime mean makes e ene Te eatie letl Ire generate revenues Revenue and Empemlee mitten Iln eeeerdemee e 39l 5e er ellhlr eeeeuntjng p ne illilee W e Accrualbasis accounting transactions that change a company39s financial statements are recorded in the periods in which the events occur even if cash was not exchanged i Cashbasis accounting companies record revenue when they receive cash and an expense when they pay out cash not in accordance with generally accepted accounting principles B The Basics of Adjusting Entries a Adjusting entries ensure that the revenue recognition and expense recognition principles are followed i It is necessary because the trial balance may not contain up to date and complete data 1 Some events are not recorded daily because it is not efficient to do so 2 Some costs are not recorded during the accounting period because these costs expire with the passage of time rather than as a result of recurring daily transactions 3 Some items may be unrecorded ii Every adjusting entry will include one income statement account and one balance sheet account b Deferrals i Prepaid expenses expenses paid in cash before they are used or consumed 1 An adjusting entry results in an increase debit to an expense account and a decrease credit to an asset account 2 Assets overstated expenses understated ii Unearned revenues cash received before services are performed 1 Adjusting entry for unearned revenues results in a decrease debit to a liability account and increase credit to a revenue account 2 Liabilities overstated revenues understated b Accruals increase both a balance sheet and an income statement account i Accrued revenues revenues for services performed but not yet received in cash or recorded 1 Adjusting entry for accrued revenues results in an increase debit to an asset account and in increase credit to a revenue account 2 Assets understated revenues understated ii Accrued expenses expenses incurred but not yet paid in cash or recorded 1 Adjusting entry for accrued expenses results in an increase debit to an expense account and in increase credit to a liability account 2 Expenses understated Liabilities understated ii Accrued interest Face Value of Note x Annual Interest Rate x Times in Terms of One Year Interest b Depreciation process of allocating the cost of an asset to expense over its useful life allocates an asset39s cost to the periods in which it is used not to report actual change in the value of the asset i Contra asset account an account is offset against an asset account on the balance sheet ii Book Value the difference between the cost of any depreciable asset and its related accumulated depreciation B The Adjusted Trial Balance and Financial Statements a Adjusted trial balance after a company has journalized and posted all adjusting entries it prepares another trial balance from the ledger accounts i Shows the balance of all accounts including those adjusted at the end of the accounting period ii Purpose prove the equality of the total debit balances and the total credit balances in the ledger after all adjustments b Companies can prepare financial statements directly from an adjusted trial balance c Earnings management planned timing of revenues expenses gains and losses to smooth out bumps in the net income i Quality of earnings provides full and transparent information that will not confuse or mislead users of the financial statements when high B Closing the Books a Temporary accounts all revenue accounts all expense accounts dividends i Permanent accounts all asset accounts all liability accounts stockholders equity accounts b Closing entries transfer net income or net loss and dividends to Retained Earnings so the balance in Retained Earnings agrees with the retained earnings statement i Produces a zero balance in each temporary account ii Permanent accounts are not closed iii Income summary balance is the net income or loss for the year Closed and then transferred the net income or net loss from this account to Retained Earnings b Postclosing trial balance list of all permanent accounts and their balances after closing entries are journalized and posted i Purpose prove the equality of the total debit balances and total credit balances of the permanent account balances that the company carries forward into the next accounting period b Accounting Cycle j J 1 EH FEEquot Hi nmm H W mg ma a 1 ah 335 425 19 Mid E wm E imam H15 Egan man nan Wth