Kế toán, kiểm toán - Chapter 3: Adjusting accounts and preparing financial statements

Chapter 3ADJUSTING ACCOUNTS AND PREPARING FINANCIAL STATEMENTSTHE ACCOUNTING PERIODC 1AccountingACCRUAL BASIS VERSUS CASH BASISAccrual BasisRevenues are recognized when earned and expenses are recognized when incurred.Cash BasisRevenues are recognized when cash is received and expenses are recorded when cash is paid.C 2Cash BasisRevenues are recognized when cash is received and expenses are recorded when cash is paid.AccountingACCRUAL BASIS VERSUS CASH BASISNon-GAAPC 2Accrual BasisRevenues are recognized when earned and expenses are recognized when incurred.ACCRUAL BASIS VERSUS CASH BASISOn the cash basis, the entire $2,400 would be recognized as insurance expense in 2011. No insurance expense from this policy would be recognized in 2012 or 2013, periods covered by the policy.C 2ACCRUAL BASIS VERSUS CASH BASISOn the accrual basis, $100 of insurance expense is recognized in 2011, $1,200 in 2012, and $1,100 in 2013. The expense is matched with the periods benefited by the insurance coverage.C 2We have delivered theproduct to our customer,so I think we should recordthe revenue earned.RECOGNIZING REVENUES & EXPENSESRevenue Recognition PrincipleC 2RECOGNIZING REVENUES & EXPENSESRevenue Recognition Principle Matching PrincipleSummaryof ExpensesRentGasolineAdvertisingSalariesUtilitiesand . . . . $1,0005002,0003,000450. . . .Now that we haverecognized the revenue,let’s see what expenseswe incurred togenerate that revenue.C 2 An adjusting entry is recorded to bring an asset or liability account balance to its proper amount.ADJUSTING ACCOUNTSPrepaid (Deferred) expenses*Unearned (Deferred) revenuesAccruedexpenseAccruedrevenuesFramework for Adjustments*including depreciationPaid (or received) cash before expense (or revenue) recognizedPaid (or received) cash after expense (or revenue) recognizedAdjustmentsC 3Here is the checkfor my 24-monthinsurance policy.PREPAID (DEFERRED) EXPENSESResources paid for prior to receiving the actual benefits.P 1PREPAID INSURANCE (a) On 12/1/11, FastForward paid $2,400 for insurance for 2-years (24-months, December 2011 through November 2013). FastForward recorded the expenditure as Prepaid Insurance on 12/31/11. What adjustment is required?637128P 1SUPPLIES (b) During 2011, FastForward purchased $9,720 of supplies. FastForward recorded the expenditures in the asset account, “Supplies.” On December 31, 2011, a count of the supplies indicated $8,670 on hand, so $1,050 of supplies were used during December. What adjustment is required?126652P 1OTHER PREPAID EXPENSESOther prepaid expenses, such as Prepaid Rent, are accounted for exactly as Insurance and Supplies. We should note that some prepaid expenses are both paid for and fully used up within a single period. For example, a company may pay monthly rent on the first day of each month. This payment creates a prepaid expense on the first day of the month that fully expires by the end of the month.In these special cases, we can record the cash paid with a debit to the expense account instead of an asset account.P 1Straight-LineDepreciationExpense= Asset Cost - Salvage Value Useful LifeDEPRECIATION Depreciation is the process of allocating the cost of a plant asset over its useful life in a systematic and rational manner.P 1END OF CHAPTER 3