Adjusting Accounts for Financial Statements

Accrual Basis Accounting ...

• Adjusting accounts for unrecorded transactions.

• Record revenues when cash is received and expenses when cash is paid.

• Records revenues when earned and expenses when resources are consumed.

• Preparing financial statements for third party users.

Cash Basis Accounting

• Is a subset of Accrual Basis Accounting.

• Is Generally Accepted.

• Recognizes revenues and expenses when cash is exchanged.

• There is no such thing.

The Revenue Recognition principle demands that ...

• Revenues are recorded when the business owner gets around to it.

• Revenues are recorded when earned (a good or service is provided).

• Revenues are recorded when cash is exchanged.

• Revenues are recorded are summarized and recorded at the end of the business cycle.

The expense recognition (matching principle) requires that ...

• Expenses are documented by receipts.

• Expenses are recorded at the end of every month.

• Expenses are recorded when cash is paid.

• Expenses be recorded in the same accounting period as the revenues that are recognized as a result of those expenses.

A deferral of expense includes the following

• Prepaids, Supplies, Depreciation

• Unearned Revenues

• Accrued expenses

• Accrued Revenues

The purpose of the worksheet is to ...

• Give me a headache

• Analyze source documents

• Record transactions

• See the effects of adjusting entries on the accounts and the financial statements, and to calculate net income.

Adjusting entries ...

• Always affect one permanent (balance sheet) account and one temporary (income statement) account.

• Are like bigfoot. They don't exist.

• Are recorded on a daily basis through the accounting period.

• Adjust the profit or loss to meet shareholder expectations.

The four categories of adjusting entries are ... (Select all that apply)

• Prepaid expenses and Unearned revenues

• Accumulated Depreciation and Depreciation Expense

• Accounts receivable and Accounts payable

• Accrued expenses and Accrued revenues

Supplies are

• Recorded in the Supplies asset account. The amount used during the year is adjusted to Supplies expense at the end of the period.

• Recorded to Supplies expense.

• Recorded to Retained Earnings

• Recorded once time per year.

Prepaid Insurance is insurance paid for in advance and expensed

• At the beginning of the period.

• Directly to retained earnings.

• to Insurance expense over time as the policy expires.

• On the General Ledger.