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Financial Accounting 1 Week 2 Summary
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Financial Accounting 1 Week 2 Summary including readings
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Week 2 :Preparation : Chapter 1: Accounting
in action
Accountants divide the economic life of a business into artificial time periods -> Time
period/Periodicity assumption. They are generally a month, a quarter (both called
interim periods) or a year (called fiscal year).
Accrual-basis accounting is when transactions are recorded in the periods in which
the events occur (when the
service is performed) -> More
used.
Cash-basis accounting records
revenue when they receive
cash.
The revenue recognition
principle requires company to
recognize revenue in the
accounting period in which the
performance obligation is
satisfied.
The expenses
recognition principle requires
company to recognize the
expenses in the period in
which they make efforts to generate revenue.
Adjusting entries ensure that the revenue recognition and expense recognition are
followed. -> Necessary for trial balance ( the first pulling together of transaction
data).
Also:
- Some events are not recorded daily cause inefficient. (use of supply/
Employees’ earning wages)
- Some costs are not recorded during the accounting period because they
expire with the passage of time and not with recurring daily transactions.
- Some items are not recorded (but are for another period)
So adjusting entries are required and will include one income statement account and
one statement of financial position account.:
- Deferrals:
1- Prepaid expenses: paid in 2- Unearned revenues: Cash
cash before being used received before performing
services.
- Accruals:
1- Accrued revenues: Revenues 2- Accrued expenses: Expenses
for services performed but incurred but not yet paid in
not yet received in cash or cash or recorded.
recorded.
Adjusting entries for Deferrals:
To defer= to postpone or delay.
, Prepaid expenses are also called prepayment. Ex: insurance, supplies, advertising,
rent. They expire either with the passage of time or through use. Assets are so
overstated and Priors understated.
Depreciation is the process of allocating the cost of an asset to expense over its
useful life. It is an allocation concept, not a valuation one. It allocates an asset’s cost
to the period in which it is used. It does not attempt to report the actual change in
the value of the asset.
Accumulated Depreciation: contra asset account.
Book value: ≠ btw cost of any depreciable asset and its related accumulated
depreciation.
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