Chapter 3 - Adjusting the accounts. In this chapter, the learning objectives are: Explain the time period assumption, explain the accrual basis of accounting, explain the reasons for adjusting entries, identify the major types of adjusting entries, prepare adjusting entries for deferrals. | Adjusting The Accounts 3 Learning Objectives Explain the accrual basis of accounting and the reasons for adjusting entries. Prepare adjusting entries for deferrals. Prepare adjusting entries for accruals. 3 Describe the nature and purpose of an adjusted trial balance. 2 1 4 Generally a month, quarter, or year. Accountants divide the economic life of a business into artificial time periods (Time Period Assumption). Jan. Feb. Mar. Apr. Dec. . . . . . Alternative Terminology The time period assumption is also called the periodicity assumption. LEARNING OBJECTIVE Explain the accrual basis of accounting and the reasons for adjusting entries. 1 LO 1 Monthly and quarterly time periods are called interim periods. Most large companies must prepare both quarterly and annual financial statements. Fiscal Year = Accounting time period that is one year in length. Calendar Year = January 1 to December 31. Fiscal and Calendar Years LO 1 The time period assumption states that: revenue should be recognized in the accounting period in which it is earned. expenses should be matched with revenues. the economic life of a business can be divided into artificial time periods. the fiscal year should correspond with the calendar year. Question Fiscal and Calendar Years LO 1 Accrual-Basis Accounting Transactions recorded in the periods in which the events occur. Companies recognize revenues when they perform services (rather than when they receive cash). Expenses are recognized when incurred (rather than when paid). In accordance with generally accepted accounting principles (GAAP). Accrual- versus Cash-Basis Accounting LO 1 Cash-Basis Accounting Revenues recognized when cash is received. Expenses recognized when cash is paid. Cash-basis accounting is not in accordance with generally accepted accounting principles (GAAP). Accrual- versus Cash-Basis Accounting LO 1 REVENUE RECOGNITION PRINCIPLE Recognize revenue in the accounting period in which the performance obligation is satisfied. . | Adjusting The Accounts 3 Learning Objectives Explain the accrual basis of accounting and the reasons for adjusting entries. Prepare adjusting entries for deferrals. Prepare adjusting entries for accruals. 3 Describe the nature and purpose of an adjusted trial balance. 2 1 4 Generally a month, quarter, or year. Accountants divide the economic life of a business into artificial time periods (Time Period Assumption). Jan. Feb. Mar. Apr. Dec. . . . . . Alternative Terminology The time period assumption is also called the periodicity assumption. LEARNING OBJECTIVE Explain the accrual basis of accounting and the reasons for adjusting entries. 1 LO 1 Monthly and quarterly time periods are called interim periods. Most large companies must prepare both quarterly and annual financial statements. Fiscal Year = Accounting time period that is one year in length. Calendar Year = January 1 to December 31. Fiscal and Calendar Years LO 1 The time period assumption states that: revenue should be .
