Download Accounting Cycle and Accrual Basis of Accounting | ACCT 2001 and more Study notes Financial Accounting in PDF only on Docsity! 9/16/2011 Accounting Chapter 4: Accounting cycle- 1. Analyze business transactions 2. Journalize the transactions 3. Post to ledger accounts 4. Prepare a trial balance 5. Journalize and post adjusting entries: deferrals/accruals 6. Prepare an adjusting trial balance 7. Prepare financial statements 8. Journalize and post closing entries 9. Prepare a post closing trial balance Accountants divide the economic life of a business into artificial time periods (periodicity assumption). -Generally a month, a quarter, or a year -Fiscal year vs. calendar year The revenue Recognition Principle Companies recognize revenue in the accounting period in which it is earned. In a service enterprise, revenue is considered to be earned at the time the service is performed. Expense Recognition Principle: Expenses matched with revenues in the period when efforts are expended to generate revenues. “Let the expenses follow the revenues” Accrual versus Cash Basis of Accounting Accrual-Basis Accounting -Transactions recorded in the periods in which the events occur -Revenues are recognized when earned, even if cash was not received -Expenses are recognized when incurred, even if cash was not paid. The Basis of Adjusting Entries -Adjusting entries- needed to ensure that the revenue recognition and expense recognition principles are followed Types of adjusting entries Deferrals 1. Prepaid expenses: expenses paid in cash and recorded as assets before they are used or consumed 2. Unearned revenues: cash received and reported as liabilities before revenue in earned Accruals: 1. Accrued revenues: revenues earned but not yet received in cash or recorded 2. Accrued expenses: expenses incurred but not yet paid in cash or recorded. ADJUSTING JOURNAL ENTRIES NEVER USE THE CASH ACCOUNT Deferrals are either: -Prepaid expenses Or -Unearned revenues Payments of cash that is recorded as an asset because service or benefit will be received in the future. Cash payments BEFORE Expense recorded Prepayments often occur in regard to: -Insurance -Supplies -Advertising -Rent -Equipment Prepaid Expenses -Costs that expire either with the passage of time or through use. -Adjusting entry results in an increase (a debit) to an expense account and a decrease (a credit) to an asset account. Prepaid Expenses DR-Expense (Rent, Supplies) [Expense] CR- Prepaid Expense [Asset] Depreciation -Buildings, equipment, and motor vehicles (long-lived assets) are recorded as assets, rather than an expense, in the year acquired. -Companies report a portion of the cost of a long-lived asset as an expense during each period of the asset’s usual life -Depreciation does not attempt to report the actual change in the value of the asset -Cost Allocation not Valuation
