In this chapter students will be able to: Explain accrual basis accounting, and when to recognize revenues and expenses, prepare adjusting entries for prepayments, prepare adjusting entries for accruals, describe the nature and purpose of an adjusted trial balance, and prepare one;. | CHAPTER 3: Adjusting the Accounts Explain accrual basis accounting, and when to recognize revenues and expenses. Prepare adjusting entries for prepayments. Prepare adjusting entries for accruals. Describe the nature and purpose of an adjusted trial balance, and prepare one. Prepare adjusting journal entries for the alternative treatment of prepayments. Copyright John Wiley & Sons Canada, Ltd. 2 Adjusting the Accounts Timing issues Selecting an accounting time period Accrual versus cash basis of accounting Revenue and expense recognition Basics of adjusting entries Types of adjusting entries Prepayments and accruals Adjusted trial balance and financial statements Copyright John Wiley & Sons Canada, Ltd. 3 Time Periods The economic life of a business can be divided into time periods Generally a month, quarter, or year Periods of less than one year are called interim periods Period of one year is called a fiscal year Copyright John Wiley & Sons Canada, Ltd. 4 Accrual Versus Cash Basis Accounting Accrual basis: Events are recorded in the period when they occur Not when the cash is paid or received Cash basis: Revenue recorded when cash is received Expenses recorded when cash is paid Copyright John Wiley & Sons Canada, Ltd. 5 Revenue Recognition Revenue is recognized when there is an increase in assets or a decrease in liabilities as a result of business activities with customers Revenue recognition criteria provides guidance: Generally when the service is performed or when goods are sold and delivered Copyright John Wiley & Sons Canada, Ltd. 6 Expense Recognition Expenses are decreases in assets or increases in liabilities from business activities Expense recognition criteria provides guidance: Tied to revenue recognition when a direct association exists between costs incurred and earning of revenue For long-lived assets, expenses are recognized over the life of the asset Otherwise expenses are reported in period incurred Copyright John Wiley & Sons Canada, Ltd. 7 The | CHAPTER 3: Adjusting the Accounts Explain accrual basis accounting, and when to recognize revenues and expenses. Prepare adjusting entries for prepayments. Prepare adjusting entries for accruals. Describe the nature and purpose of an adjusted trial balance, and prepare one. Prepare adjusting journal entries for the alternative treatment of prepayments. Copyright John Wiley & Sons Canada, Ltd. 2 Adjusting the Accounts Timing issues Selecting an accounting time period Accrual versus cash basis of accounting Revenue and expense recognition Basics of adjusting entries Types of adjusting entries Prepayments and accruals Adjusted trial balance and financial statements Copyright John Wiley & Sons Canada, Ltd. 3 Time Periods The economic life of a business can be divided into time periods Generally a month, quarter, or year Periods of less than one year are called interim periods Period of one year is called a fiscal year Copyright John Wiley & Sons Canada, Ltd. 4 Accrual Versus Cash Basis .
