2. REVENUE RECOGNITION
PRINCIPLE
The revenue recognition principle dictates
that revenue be recognized in the
accounting period in which it is earned.
In a service business, revenue is considered
to be earned at the time the service is
performed.
3. THE MATCHING PRINCIPLE
The practice of expense recognition is
referred to as the matching principle.
The matching principle dictates that efforts
(expenses) be matched with
accomplishments (revenues).
Revenues expenses
earned are offset incurred in
this month against.... earning the
revenue
5. ADJUSTING ENTRIES
Adjusting entries are required each time
financial statements are prepared.
Adjusting entries can be classified as
1 prepayments (prepaid expenses or
unearned revenues) OR
2 accruals (accrued revenues or accrued
expenses)
6. TYPES OF
ADJUSTING ENTRIES
Prepayments
1 Prepaid Expenses — Expenses paid in cash
and recorded as assets before they are used
or consumed
2 Unearned Revenues — cash received and
recorded as liabilities before revenue is
earned
7. TYPES OF
ADJUSTING ENTRIES
Accruals
1 Accrued Revenues — Revenues earned but
not yet received in cash or recorded
2 Accrued Expenses — Expenses incurred but
not yet paid in cash or recorded
8. ILLUSTRATION 3-3
TRIAL BALANCE
The Trial Balance
is the starting
place for adjusting
entries.
10. ACCRUALS
The second category of adjusting entries
is accruals.
Adjusting entries for accruals are
required to record revenues earned and
expenses incurred in the current period.
The adjusting entry for accruals will
increase both a balance sheet and an
income statement account.
12. ACCRUED REVENUES
Accrued revenues may accumulate with
the passing of time or through services
performed but not billed or collected.
An asset-revenue account relationship
exists with accrued revenues.
Prior to adjustment, assets and revenues
are understated.
The adjusting entry requires a debit to an
asset account and a credit to a revenue
account.
13. ADJUSTING ENTRIES FOR ACCRUALS
ACCRUED REVENUES
ADJUSTMENT
ADJUSTMENT October 31, the agency earned $200
for advertising services that were not
billed to clients before October 31.
JOURNAL ENTRY
JOURNAL ENTRY
POSTING
POSTING
14. ACCRUED EXPENSES
Accrued expenses are expenses incurred
but not paid yet.
A liability-expense account relationship
exists
Prior to adjustment, liabilities and
expenses are understated
The Adjusting Entry results in a debit to
an expense account and a credit to a
liability account
15. ADJUSTING ENTRIES FOR ACCRUALS
ACCRUED INTEREST
ADJUSTMENT
ADJUSTMENT October 31, the portion of the interest to be accrued
on a 3-month note payable is calculated to be $50.
JOURNAL ENTRY
JOURNAL ENTRY
POSTING
POSTING
16. ADJUSTING ENTRIES FOR ACCRUALS
ACCRUED SALARIES
ADJUSTMENT
ADJUSTMENT October 31, accrued salaries
are calculated to be $1,200.
JOURNAL ENTRY
JOURNAL ENTRY
POSTING
POSTING
17. ILLUSTRATION 3-16
SUMMARY OF ADJUSTING ENTRIES
1 Prepaid Assets and Assets overstated Dr.
Dr.
Expenses expenses expenses Expenses understated Cr.
Cr.
Assets
2 Unearned Liabilities and Liabilities overstated Dr. Liabilities
Dr.
revenues revenues Revenues understated Cr. Revenues
Cr.
3 Accrued Assets and Assets understated Dr. Assets
Dr.
revenues revenues Revenues understated Cr.Cr.
Revenues
4 Accrued Expenses and Expenses understated Dr. Expenses
Dr.
expenses liabilities Liabilities understated Cr. Liabilities
Cr.
18. Effects of the Adjusting Entries
Make end-of-
Journalize year
Post entries to Prepare trial
transactions. adjustments.
the ledger balance.
accounts.
Let’s look at JJ’s Lawn Care
Let’s look at JJ’s Lawn Care
Services’ adjusted trial balance.
Services’ adjusted trial balance. Prepare adjusted
trial balance.
Hinweis der Redaktion
2
3
5
12
3 We have completed the accounting process through the preparation of end of period adjusting entries and can now prepare the adjusted trial balance.