The document discusses key accounting principles such as revenue recognition, matching principle, and adjusting entries. It defines different types of adjusting entries including prepaid expenses, unearned revenues, accrued revenues, and accrued expenses. Examples are provided for journal entries to record accrued revenues and expenses. The summary identifies the major concepts covered in the document which are the different types of adjusting entries and how to prepare adjusting entries for accruals.
The trial balance contains only those items which have been recorded in the books of accounts during the accounting Adjusting Entries period and does not contain those items which are not recorded although such unrecorded items belong to the current accounting period. Copy the link given below and paste it in new browser window to get more information on Adjusting Entries:- http://www.transtutors.com/homework-help/accounting/adjusting-entries.aspx
When a general ledger account is graphically represented it is known as T Account. T Account helps in knowing individual ledger accounts and what will be the effect of each transaction. While preparing individual ledger each transaction gets organized and summarized. Copy the link given below and paste it in new browser window to get more information on T Accounts:- http://www.transtutors.com/homework-help/accounting/financial-accounting-t-accounts/
The trial balance contains only those items which have been recorded in the books of accounts during the accounting Adjusting Entries period and does not contain those items which are not recorded although such unrecorded items belong to the current accounting period. Copy the link given below and paste it in new browser window to get more information on Adjusting Entries:- http://www.transtutors.com/homework-help/accounting/adjusting-entries.aspx
When a general ledger account is graphically represented it is known as T Account. T Account helps in knowing individual ledger accounts and what will be the effect of each transaction. While preparing individual ledger each transaction gets organized and summarized. Copy the link given below and paste it in new browser window to get more information on T Accounts:- http://www.transtutors.com/homework-help/accounting/financial-accounting-t-accounts/
Financial Statements Research for a Publicly-Traded Company Fi.docxAKHIL969626
Financial Statements Research for a Publicly-Traded Company
Financial Statements Research for a Publicly-Traded Company
Financial Statements Research for a Publicly-Traded Company
In accrual accounting it is a requirement that accountants adhere to revenue recognition and matching principles, while in cash accounting basis revenue is recognized when cash is paid and expenses when they are paid for. Hence adjustments are made in accrued accounting, are classified into prepayments and accruals (Accrual Accounting Concepts, n.d)
According to the “Accrual Accounting Concepts” (n.d) Prepayments are divided into two; prepaid expenses and unearned revenues. Prepaid expenses are expenses paid in cash and recorded as assets until when they get used, while unearned revenues are those that a company receives as cash and records as liabilities before it is earned. When adjusting an entry for prepaid expenses, there will be a debit to an expense account and a credit on the asset account. Unearned revenues are adjusted debit the liability account and credit on the revenue account. Prepayments will increase an income statement account and decrease a balance sheet account.
Accruals are classified into two; accrued revenue and accrued expenses. The accrued revenueshave been earned but has not been paid for in cash, adjustments result in a debit on the asset account and credit on the revenue account. Expenses have beenincurred but no cash has been paid for, when adjusting accrued expenses; debit the expense account and credit the liability account. Accruals increase both the balance sheet and income statements accounts.
Deferrals occurs when something has been recorded but the amount is to be divided up between two or more accounting periods, are normally recorded as prepaid expense until it is used when it becomes an expense.
According to Nike’s 10-K report (2015, p. 109) the balance sheet prepaid expenses and other current assets were recorded to be 1.968 billion dollars and the accrued liabilities stood at 3.951 billion dollars. Recorded on the consolidated statement of cash flows is an increase of prepaid expense and other assets (144 million dollars) and there was an increase in accounts payable, accrued liabilities and income taxes payable (1.237 billion dollars). These shows that accrual accounting basis was used in recording the accounts.
According to Nike’s 2015 annual report (2015, p. 100) plant, property and equipment are normally recorded at cost and depreciated over its estimated useful life, in those situations that the useful life of a long-term asset should be reduced, depreciation expense is increased over remainder of the useful life. Depreciation expense of 606 million dollars was recorded on the cash flow statement and an accumulated depreciation of 3.341 billion dollars (Nike’s annual report 2015, p. 118) which is the cumulative depreciation of an asset to a point in its life.
Amortization is the spreading of capital e ...
2. REVENUE RECOGNITION
PRINCIPLE
The revenue recognition principle dictates
that revenue be recognized in the
accounting period in which it is earned.
In a service business, revenue is considered
to be earned at the time the service is
performed.
3. THE MATCHING PRINCIPLE
The practice of expense recognition is
referred to as the matching principle.
The matching principle dictates that efforts
(expenses) be matched with
accomplishments (revenues).
Revenues expenses
earned are offset incurred in
this month against.... earning the
revenue
5. ADJUSTING ENTRIES
Adjusting entries are required each time
financial statements are prepared.
Adjusting entries can be classified as
1 prepayments (prepaid expenses or
unearned revenues) OR
2 accruals (accrued revenues or accrued
expenses)
6. TYPES OF
ADJUSTING ENTRIES
Prepayments
1 Prepaid Expenses — Expenses paid in cash
and recorded as assets before they are used
or consumed
2 Unearned Revenues — cash received and
recorded as liabilities before revenue is
earned
7. TYPES OF
ADJUSTING ENTRIES
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
8. ILLUSTRATION 3-3
TRIAL BALANCE
The Trial Balance
is the starting
place for adjusting
entries.
10. ACCRUALS
The second category of adjusting entries
is accruals.
Adjusting entries for accruals are
required to record revenues earned and
expenses incurred in the current period.
The adjusting entry for accruals will
increase both a balance sheet and an
income statement account.
12. ACCRUED REVENUES
Accrued revenues may accumulate with
the passing of time or through services
performed but not billed or collected.
An asset-revenue account relationship
exists with accrued revenues.
Prior to adjustment, assets and revenues
are understated.
The adjusting entry requires a debit to an
asset account and a credit to a revenue
account.
13. ADJUSTING ENTRIES FOR ACCRUALS
ACCRUED REVENUES
ADJUSTMENT
ADJUSTMENT October 31, the agency earned $200
for advertising services that were not
billed to clients before October 31.
JOURNAL ENTRY
JOURNAL ENTRY
POSTING
POSTING
14. ACCRUED EXPENSES
Accrued expenses are expenses incurred
but not paid yet.
A liability-expense account relationship
exists
Prior to adjustment, liabilities and
expenses are understated
The Adjusting Entry results in a debit to
an expense account and a credit to a
liability account
15. ADJUSTING ENTRIES FOR ACCRUALS
ACCRUED INTEREST
ADJUSTMENT
ADJUSTMENT October 31, the portion of the interest to be accrued
on a 3-month note payable is calculated to be $50.
JOURNAL ENTRY
JOURNAL ENTRY
POSTING
POSTING
16. ADJUSTING ENTRIES FOR ACCRUALS
ACCRUED SALARIES
ADJUSTMENT
ADJUSTMENT October 31, accrued salaries
are calculated to be $1,200.
JOURNAL ENTRY
JOURNAL ENTRY
POSTING
POSTING
17. ILLUSTRATION 3-16
SUMMARY OF ADJUSTING ENTRIES
1 Prepaid Assets and Assets overstated Dr.
Dr.
Expenses expenses expenses Expenses understated Cr.
Cr.
Assets
2 Unearned Liabilities and Liabilities overstated Dr. Liabilities
Dr.
revenues revenues Revenues understated Cr. Revenues
Cr.
3 Accrued Assets and Assets understated Dr. Assets
Dr.
revenues revenues Revenues understated Cr.Cr.
Revenues
4 Accrued Expenses and Expenses understated Dr. Expenses
Dr.
expenses liabilities Liabilities understated Cr. Liabilities
Cr.
18. Effects of the Adjusting Entries
Make end-of-
Journalize year
Post entries to Prepare trial
transactions. adjustments.
the ledger balance.
accounts.
Let’s look at JJ’s Lawn Care
Let’s look at JJ’s Lawn Care
Services’ adjusted trial balance.
Services’ adjusted trial balance. Prepare adjusted
trial balance.
Editor's Notes
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3
5
12
3 We have completed the accounting process through the preparation of end of period adjusting entries and can now prepare the adjusted trial balance.