ACCOUNTING CH3: The accounting Cycle: End if the period

Accrual Basis Accounting

1) we record revenues in the period that goods and services are provided to customers 2) We record expenses in the period that costs are used to provide those goods and services to customers All major companies use a accrual basis accounting To measure business transactions

Income Statement

1- Total revenues include products and services provided to customers during the reporting period 2- total expenses include cost used to operate the business during the reporting period 3- net income equals total revenues minus total expenses 4- The income statement reports revenues and expenses over an interval of time.

no adjustment entry necessary

1- for transactions that do not involve revenue or expense activities 2- for transactions that result in revenues expenses being recorded at the same time as cash flow

Measurement Process

1. Record and post adjusting entries (complete the measurement process) 2. Prepare financial statements (the reporting process) 3. Record and post closing entries (the closing process)

Classified Balance Sheet

A balance sheet that groups a companies assets and liability accounts into current and long-term categories 1- Total assets are separated into current and long-term assets 2- total liabilities are separated into current and long-term liabilities 3- total stockholders equity includes common stock and retained earnings from the statement of stockholders equity 4- total assets must equal total liabilities plus stockholders equity 5- The balance sheet reports assets, liabilities, and stockholders equity at a point in time

Accrued Revenues

A company provides products or services but hasn't received cash yet Because the company has provided products and services in the current period and has the right to receive payment, and adjusting entries needed to one, record an asset for the amount expected to be received and two, recognize revenue

adjusted trial balance

A list of all accounts and their balances after we have updated account balances for adjusting entries

post-closing trial balance

A list of all accounts and their balances at a particular date after we have updated the account balances for closing entries

Key point

Adjusting entries are needed when cash flow's or obligations occur before the revenue or expense related activity aka pre-payment or when cash flows occur after the revenue or expense related activity a.k.a. accrual

Kp

After we post the closing entries to the general ledger the balance of retained earnings equals the amount shown in the balance sheet. The balances of all revenue and expense and dividend towns are zero at this point

contra account

An account with a balance that is opposite, or "contra," to that of its related accounts.

Expense recognition

Any costs used to help generate revenues are recorded as expenses in the same period as those revenues. Implied in recognition of many expenses is a cause-and-effect relationship between revenues and expenses Key point: most expenses are recorded in the same period as the revenues they help to generate. Other expenses indirectly related to producing revenues are recorded in the period They occur

Accrued expense

Because the company has used these cost to operate the company in the current period and is obligated to pay them, and adjusting entry as needed to one record the liability to be paid and to recognize the cost as an expense

Accrual basis compared with cash basis accounting

Cash Basis Accounting 1. We record revenues at the time we receive cash 2. We record expenses at the time we pay cash Under cash basis accounting the revenues and expenses are only recorded at the time cash is exchanged. In accrual basis accounting, revenues can be recorded before, during or after the company receives cash from customers. Bc revenues is recorded at the time of provided goods.

Generally excepted accounting principles

Cash basis accounting is not part of generally excepted accounting principles. All major companies use accrual basis accounting to record revenues when goods and services are provided and to properly record expense in the period Those costs have been used in company operations.

Kp

Closing entries increase retained earnings by the amount of revenue for the period and decrease retained earnings by the amount of expenses and dividends for the period

closing entries

Closing entries transfer the balances of all temporary accounts a.k.a. revenues, expenses, and dividends to the balance of the retained earnings account

Period cost

For example suppose FedEx ps $.60 thousand dollars to rent an office building for one year. Rather than trying to determine whether and how much revenue is generated each month by the building rent, the company would recognize $5000 in rent expense each month over the rental period.

Example of revenue recognition

If FedEx delivers a package or American eagle sells a shirt the company records revenue at that time. If a company sells goods or services to a customer in 2021 the company should report the revenue in it's 2021 income statement.

Deferred revenue key point

In the. Those services are provided, the liability is settled, and an adjusting entry is needed to one, decrease the liability to its remaining amount owed and two, recognize revenue

Depreciation Expense

On balance sheet. Deprivation expense will be a debit and accumulated depreciation will be credit

prepayments and accruals

Pre-payments involve cash flow is occurring before the revenues and expenses are recognized. Accruals involve cash flow's occurring after the revenues and expenses are recognized. For example an accrued expense in involved when a company owes salaries to employees at the end of the current period but will not pay those salaries until the following period.

Prepaid expense

Prepaid expenses arise when a company pays cash or has an obligation to pay cash to acquire an acid that is not use until later period. Cash is paid now and then later the expense is recognized. Clue the purchase of buildings equipment or supplies or the payment of rent in advance. Recorded as assets at the time of Purchase. In the. These assets are used, and adjusting entry is needed to one decrease the assets balance to its remaining unused amount and to recognize an expense for the cost of asset used.

Prepaid Rent

Recorded $6000 payment on December 1 as an asset -pre-paid rent. by the end of this month $500 will be used and will expire. So next month we will have $5500 remaining prepaid rent (adjusting entry) because prepaid rent expires $500

Revenue recognition

Revenue is recorded in the period in which goods and services are provided to customers according to the revenue recognition principle

temporary accounts

Revenues expenses and dividends

No timing differences

The inflow of cash occurs in the same period that the services are provided. The outflow of cash occurs in the same period as the cost used for providing services.

Depreciation

The process of allocating the cost of an asset, such as equipment, to expense over the assets useful life

KEY POINT

The revenue recognition principle states that revenue is recognized in the. Which goods and services are provided to customers, NOT NECESSARILY WHEN YOU RECEIVE CASH

adjusting entries

Timing differences often cause account balances of assets, liabilities, revenues, and expenses to not be updated during the period. We must bring financial statements of accounts balances up to date. Adjusting entries are used to record changes in assets and liabilities and related revenues and expenses that have occurred during the period but that we have not yet Recorded. Key point: necessary part of accrual basis accounting

Key point

Under both accrual basis and cash basis accounting, all revenues are eventually recorded for the same amount The key difference between both methods is timing

Kp

We post adjusting entries to the general ledger to update the account balances

Key point

Weprepare the income statement, statement of stockholders equity, and balance sheet from the adjusted trial balance. The income statement provides a measure of net income a.k.a. profitability, calculated as revenues minus expenses. The balance sheet demonstrates that assets equal liabilities plus stockholders equity a.k.a. the basic accounting equation.

permanent accounts

all accounts that appear in the balance sheet, including retained earnings ; account balances are carried forward from period to period

Book Value

cost - accumulated depreciation