Recording Revenues and Expenses

1
Recording Revenues and Expenses

• Cash Basis recorded in month when cash is
  received or paid
• Accrual Basis (required by GAAP) recorded when
• Revenues are earned
• Expenses are incurred

2
Period and Matching Concepts

• Accounting Period Concept financial statements
  are prepared periodically (monthly)
• Matching Concept revenues and related expenses
  are recorded in the same period (month)

3
Adjusting Entry Process

• Journal entries that must be made to bring the
• accounts up-to-date at the end of each month
• All adjusting entries involve at least one Income
  Statement account and at least one Balance Sheet
  Account

4
Types of Adjustments

• Deferrals created by deferring or delaying the
  recognition of revenues or expenses deferrals
  are adjusted at month-end
• Accruals unrecorded revenues or expenses

5
Deferred Expenses (Prepaid Expenses)

• Initially recorded as Assets but turn into
• expenses over time as assets are used-up
• Examples 1) Supplies 2) Prepaid Rent or
• Insurance
• Steps Involved
• 1) Pay one year of rent (record payment)
• 2) Adjust used portion at the end of each month

6
Deferred Revenue (Unearned Revenue)

• Initially recorded as Liabilities but turn into
• revenue over time as revenue is earned
• Examples 1) Unearned Rent 2) Magazine
• Subscriptions
• Steps Involved
• 1) Received one year of rent (record receipt)
• 2) Adjust earned portion at the end of each
  month

7
Accrued Expenses

• Expenses that have been incurred but have not
• been recorded at month-end
• Examples 1) Wages Expense 2) Repair Expense
• Steps Involved
• 1) Identify unrecorded expenses at month-end
• 2) Record these expenses

8
Accrued Revenues

• Revenues that have been earned but have not
• been recorded at month-end
• Examples 1) Unbilled Services 2) Interest on
• Notes Receivable
• Steps Involved
• 1) Identify unrecorded revenues at month-end
• 2) Record these revenues

9
Fixed Assets

• Physical resources that are owned and used by
• a business and are permanent or have a long
• life
• Depreciation the decrease in usefulness of a
  Fixed Asset over its life
• Accumulated Depreciation an account that
  accumulates the depreciation recorded on Fixed
  Assets
• Contra Asset Account an account offset against
  a related asset account on the Balance Sheet
• Book Value the cost of a Fixed Asset minus
  Accumulated Depreciation on the Fixed Asset

10
Adjustment Process

• Regular monthly journal entries
• Unadjusted Trial Balance (Debits Credits?)
• Adjusting journal entries
• Adjusted Trial Balance (Debits Credits?)
• Monthly Financial Statements