Accounting. THE BASICS OF ADJUSTING ENTRIES
Chapter 3—THE BASICS OF ADJUSTING ENTRIES
Study Objectives—after studying the chapter, you should be able to: 1. Explain the time period assumption. 2. Explain the accrual basis of accounting. 3. Explain why adjusting entries are needed. 4. Identify the major types of adjusting entries. 5. Prepare adjusting entries for deferrals (prepayments). 6. Prepare adjusting entries for accruals. 7. Describe the nature and purpose of an adjusted trial balance. 8. Prepare adjusting entries for the alternative treatment of prepayments.
INTRODUCTION: Take the following Quiz on Adjusting Entries and then check the answers on the last page of the lecture notes after you have studied this chapter:
T or F: Adjusting entries are made to apply the matching principle.
T or F: The Cash account is found in some adjusting entries.
T or F: All adjustments affect both the Balance Sheet and the Income Statement.
Matching from types of Adjusting Entries: (1) Accrued expense; (2) Accrued revenue; (3) Deferred expense; and (4) Deferred revenue:
____ Unpaid salaries
____ Rent received in advance
____ Prepaid insurance
____ Interest earned but not received
____ Rent paid in advance
____ Subscriptions received in advance
____ Rent due to us
____ Unpaid interest
I. Definitions and Key Concepts—the Accrual Basis Accounting applies these principles: A. Define the cash basis and the accrual basis of accounting: 1. Cash basis—an accounting method in which an expense is recorded when cash is paid and revenue is recorded when cash is received. Cash-basis accounting is NOT in accordance with GAAP. 2. Accrual basis—an accounting method in which an expense is recorded when it is incurred and revenue is recorded when it is earned. It is the basis of accounting in which transactions that change a company’s financial statements
Study Objectives—after studying the chapter, you should be able to: 1. Explain the time period assumption. 2. Explain the accrual basis of accounting. 3. Explain why adjusting entries are needed. 4. Identify the major types of adjusting entries. 5. Prepare adjusting entries for deferrals (prepayments). 6. Prepare adjusting entries for accruals. 7. Describe the nature and purpose of an adjusted trial balance. 8. Prepare adjusting entries for the alternative treatment of prepayments.
INTRODUCTION: Take the following Quiz on Adjusting Entries and then check the answers on the last page of the lecture notes after you have studied this chapter:
T or F: Adjusting entries are made to apply the matching principle.
T or F: The Cash account is found in some adjusting entries.
T or F: All adjustments affect both the Balance Sheet and the Income Statement.
Matching from types of Adjusting Entries: (1) Accrued expense; (2) Accrued revenue; (3) Deferred expense; and (4) Deferred revenue:
____ Unpaid salaries
____ Rent received in advance
____ Prepaid insurance
____ Interest earned but not received
____ Rent paid in advance
____ Subscriptions received in advance
____ Rent due to us
____ Unpaid interest
I. Definitions and Key Concepts—the Accrual Basis Accounting applies these principles: A. Define the cash basis and the accrual basis of accounting: 1. Cash basis—an accounting method in which an expense is recorded when cash is paid and revenue is recorded when cash is received. Cash-basis accounting is NOT in accordance with GAAP. 2. Accrual basis—an accounting method in which an expense is recorded when it is incurred and revenue is recorded when it is earned. It is the basis of accounting in which transactions that change a company’s financial statements