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Lecture Financial accounting (15/e) - Chapter 4: The accounting cycle - AccruaLs and deferrals

The learning objectives for this chapter include: Explain the purpose of adjusting entries, describe and prepare the four basic types of adjusting entries, prepare adjusting entries to convert assets to expenses, prepare adjusting entries to convert liabilities to revenue, prepare adjusting entries to accrue unpaid expenses,. | The Accounting Cycle Accruals and Deferrals Chapter 4 Chapter 4: The Accounting Cycle—Accruals and Deferrals Adjusting entries are needed whenever revenue or expenses affect more than one accounting period. Every adjusting entry involves a change in either a revenue or expense and an asset or liability. Adjusting Entries At the end of the period, we need to make adjusting entries to get the accounts up to date for the financial statements. The accrual basis dictates that revenues be recognized when earned and expenses be recognized when incurred. The accrual basis of accounting is considered to be in compliance with generally accepted accounting principles, GAAP. Every adjusting entry involves a revenue or expense and an asset or liability. Converting assets to expenses Accruing unpaid expenses Converting liabilities to revenue Accruing uncollected revenue Types of Adjusting Entries There are two broad categories of adjustments. The first is when payments are made or cash is received before the expense or revenue is recognized. This category includes prepaid or deferred expenses (including depreciation), and unearned or deferred revenues. The second major category of adjustments is when cash is paid or received after the expense or revenue is recognized. These are very common adjustments. This category includes accrued expenses and accrued revenues. Prior Periods Current Period Future Periods Transaction Paid cash in advance of incurring expense (creates an asset). End of Current Period Adjusting Entry Recognizes portion of asset consumed as expense, and Reduces balance of asset account. Converting Assets to Expenses When an adjusting entry is used to convert an asset to expense, a transaction took place in a prior period that involved the advance payment of an expense. Three common examples of adjusting entries to convert assets to expenses are the recognition of depreciation expense on plant assets, the using up of office supplies during the . | The Accounting Cycle Accruals and Deferrals Chapter 4 Chapter 4: The Accounting Cycle—Accruals and Deferrals Adjusting entries are needed whenever revenue or expenses affect more than one accounting period. Every adjusting entry involves a change in either a revenue or expense and an asset or liability. Adjusting Entries At the end of the period, we need to make adjusting entries to get the accounts up to date for the financial statements. The accrual basis dictates that revenues be recognized when earned and expenses be recognized when incurred. The accrual basis of accounting is considered to be in compliance with generally accepted accounting principles, GAAP. Every adjusting entry involves a revenue or expense and an asset or liability. Converting assets to expenses Accruing unpaid expenses Converting liabilities to revenue Accruing uncollected revenue Types of Adjusting Entries There are two broad categories of adjustments. The first is when payments are made or cash is .