This document discusses the differences between cash basis and accrual basis accounting. Cash basis accounting records revenue when cash is received and expenses when cash is paid, while accrual basis accounting records revenue when it is earned and expenses when they are incurred. Accrual basis accounting is required under GAAP and is generally used by larger businesses. The document also discusses key accrual accounting concepts like recording accruals, the accounting period, when to record revenue and expenses, and preparing adjusting entries and an adjusted trial balance.

1. The Adjusting Process
Chapter 3

2. What is the Difference between Cash Basis Accounting &
Accrual Basis Accounting?
CASH BASIS
• Revenue is recorded
when Cash is received
• Expenses are
recorded when Cash
is paid
• Not allowed under
GAAP
ACCRUAL BASIS
• Revenue is recorded
when it is earned
• Expenses are
recorded when
incurred
• Generally used by
larger businesses
• Keep in mind that the accrual basis is the preferred
way to do accounting—and it’s required by GAAP.

3. Accrual vs. Cash-Basis Accounting
• Recording Accruals

4. Accounting Period Concept
Businesses prepare financial statements for specific
periods to evaluate performance
Basic accounting period = one year
Calendar year
Fiscal year
Interim periods
Financial statements of less than one year
Monthly
Quarterly
Semi-annually

5. When to record revenue?
When it is earned
When service is provided
When the product delivered
When the earnings process is complete
Not when cash is received, accrual method
The amount of revenue to recorded?
Value of item or service transferred to customer

6. Measure all expenses incurred during the period
Match the expenses against the revenues earned
during the same period

7. Requires that accounting information be reported at
regular intervals
Accounts are updated at the end of each accounting
period

8. Prepaid
expenses
Depreciation
Accrued
expenses
Accrued
revenues
Unearned
revenues

9. Prepayments - Advance payments of expenses
Examples:
Rent
Insurance
Supplies

10. • Depreciation
Plant assets
Long-lived tangible assets used in business
operations
Examples:
Land, buildings, equipment, and furniture

11. •
Expenses incurred before payment is made
Results in a liability
Opposite of a prepaid expense
Examples:
Salaries
Interest

12. •
Revenue earned before cash is received

13. •
• Cash is collected before revenue is earned
▫ Results in a liability
▫ Owes a product or service or refund
• Also called deferred revenue

14. Prepared after adjusting entries are posted
Useful step in preparing financial statements
Often appears on a work sheet
Tool accountants use at end of period

15. Exercise P3-35A
(p. 187).

16. Income Statement