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Adjusting the Accounts

Adjusting the Accounts. March 1, 2012. Selecting an accounting time period. Time Period Assumption. The economic life of a business can be divided into artificial time periods. Accounting time periods. Generally one month, one quarter or one year

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Adjusting the Accounts

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  1. Adjusting the Accounts March 1, 2012

  2. Selecting an accounting time period

  3. Time Period Assumption The economic life of a business can be divided into artificial time periods

  4. Accounting time periods Generally one month, one quarter or one year Periods less than one year are called interim periods. Most large companies are required to report quarterly and annually

  5. Fiscal Year An accounting period that is one year long Most business use the calendar year as their accounting period (though it can be different)

  6. When transactions affect more than one period, how do we create reports?

  7. Example 1 A school creates reports for the end of each month. Students give money to the school in June, but classes don’t start until September.

  8. Example 2 A mechanic fixes a car, but is not paid until next month.

  9. Revenue Recognition Principle Revenue must be recognized in the accounting period in which it is earned.

  10. Recognizing Revenue Service companies recognize profit when the service is performed (not before) Merchandise companies recognize profit when merchandise is sold (point of sale) In general, Revenue is recognized when the sales effort is substantially complete and collection is reasonable certain.

  11. Matching Principle (expense recognition) The recognition of efforts (expenses) should be matched with accomplishments (revenues) Does not necessarily correspond to pay periods

  12. Poor Connections If the relation between expenses and revenues is not clear or direct, reasonable assumptions are made to match the expenses to the revenue they help generate.

  13. Adjusting Entries Made at the end of the accounting period. Are required to ensure that the revenue recognition and matching principles are followed. Make it possible to report Assets, Liabilities and Owners Equity on the balance sheet

  14. Why might the unadjusted trial balance may not be up-to-date?

  15. Some events not journalized daily (consumption of supplies, wages, etc.) • Some costs are not journalized daily as they expire with the passage of time (rent, insurance, amortization, etc.) • Some items not yet recorded (Utility bill delayed until next accounting period)

  16. Types of Adjusting Entries

  17. Specific Examples given on page 110-111

  18. Pre-paid Expenses Costs paid in cash and recorded as assets before they are used or consumed. Expire with either passage of time or use (insurance, supplies, etc.)

  19. Amortization/Depreciation The allocation of the cost of long-lived assets to expense over their useful lives (length of service). Calculated in various ways usually depending on the asset

  20. Straight-line amortization

  21. Walk Through Examples “DO IT” Example on Page 115 Demonstration Problem P 129 - 130

  22. Test your Knowledge Exercises 2-5 Pages 134-135

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