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Bnar - Darwish Teaching 2673 28128 1715747255 1

Chapter 3 discusses the accrual basis of accounting, emphasizing the need for adjusting entries to align revenues and expenses with the appropriate time periods. It explains the difference between accrual-basis and cash-basis accounting, highlighting that accrual accounting adheres to GAAP by recognizing revenues and expenses when they occur rather than when cash is exchanged. The chapter also outlines the purpose of an adjusted trial balance in the accounting process.

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10 views8 pages

Bnar - Darwish Teaching 2673 28128 1715747255 1

Chapter 3 discusses the accrual basis of accounting, emphasizing the need for adjusting entries to align revenues and expenses with the appropriate time periods. It explains the difference between accrual-basis and cash-basis accounting, highlighting that accrual accounting adheres to GAAP by recognizing revenues and expenses when they occur rather than when cash is exchanged. The chapter also outlines the purpose of an adjusted trial balance in the accounting process.

Uploaded by

thefoundation.koyalab
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Chapter 3

Adjusting The Accounts


Lectured by Bnar Kareem

3-1
3 Adjusting The Accounts

Learning Objectives
Explain the accrual basis of accounting and the
1 reasons for adjusting entries.

2 Prepare adjusting entries for deferrals.

3 Prepare adjusting entries for accruals.

Describe the nature and purpose of an adjusted


4 trial balance.
3-2
LEARNING Explain the accrual basis of accounting
1
OBJECTIVE and the reasons for adjusting entries.

Accountants divide the economic life of a business into


artificial time periods (Time Period Assumption).

.....
Jan. Feb. Mar. Apr. Dec.

Generally a
Alternative Terminology
 month, The time period assumption
is also called the
 quarter, or periodicity assumption.
 year.

3-3 LO 1
Fiscal and Calendar Years

 Monthly and quarterly time periods are called interim


periods.
 Most large companies must prepare both quarterly and
annual financial statements.
 Fiscal Year = Accounting time period that is one year
in length.
 Calendar Year = January 1 to December 31.

3-4 LO 1
Fiscal and Calendar Years

Question
The time period assumption states that:
a. revenue should be recognized in the accounting
period in which it is earned.
b. expenses should be matched with revenues.
c. the economic life of a business can be divided into
artificial time periods.
d. the fiscal year should correspond with the calendar
year.

3-5 LO 1
Accrual- versus Cash-Basis Accounting

Accrual-Basis Accounting
 Transactions recorded in the periods in which the
events occur.
 Companies recognize revenues when they perform
services (rather than when they receive cash).
 Expenses are recognized when incurred (rather than
when paid).
 In accordance with generally accepted accounting
principles (GAAP).

3-6 LO 1
Accrual- versus Cash-Basis Accounting

Cash-Basis Accounting
 Revenues recognized when cash is received.
 Expenses recognized when cash is paid.
 Cash-basis accounting is not in accordance with
generally accepted accounting principles (GAAP).

3-7 LO 1
Recognizing Revenues and Expenses

REVENUE RECOGNITION PRINCIPLE


Recognize revenue in the
accounting period in which the
performance obligation is
satisfied.

3-8 LO 1

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