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Summary Fm2 Chapter 3 Adjusting Entries
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A complete summary of chapter 3. HvA, IBMS first year. Financial Management 2.
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FM2 Ch 3 summary. The adjusting processNotes from lecture.
Accrual = outstanding liabilities. For example rent payable.
NEVER use the word cash.
Double entry systems.
Ppt is important.
The continuity assumption states that unless there is evidence to the contrary,
the accountant assumes that the business is a going concern and will continue to
operate indefinitely.
A 12 month accounting period is called a fiscal year. It may be the same as the
calendar year or some other 12 month period. Periods of less than a year are
called interim periods.
Nature of the adjusting process.
The economic life of the business is divided into time period. This requires that
revenues and expenses be reported in the proper period. GAAP, accrual basis
of accounting.
Under the accrual basis of accounting, revenues are reported on the income
statement in the period in which they are earned. For example, Revenue is
reported when the services are provided to customers. revenue recognition
concept.
Under the accrual basis, expenses are reported in the same period as the
revenues to which they relate. For example, utility expenses incurred in Dec are
reported as an expense and matched against Dec revenues even though the
utility bill may not be paid until matching concept, net income or loss
properly recorded.
Some businesses use the cash basis of accounting. Revenues and expenses
are reported on the income statement in the period in which cash is received or
paid. For example, fees are recorded when cash is received from clients; likewise,
wages are recorded when cash is paid to employees. Net income or loss,
revenues and expenses.
The adjusting process.
Many accounts are reported without change. Some require updating because:
1. Some expenses are not recorded daily
2. Some revenues and expenses are incurred as time passes rather than as
separate transactions
3. Some revenues and expenses may be unrecorded
The analysis and updating of accounts is called the adjusting process. The
journal entries that bring the accounts up to date are called adjusting entries.
All adjusting entries affect at least one income statement and one balance sheet
account. Thus, an adjusting entry will always involve a revenue or and expense
account and an asset or a liability account.
Types of accounts requiring adjustment.
There are four basic accounts that require adjusting entries:
1. Prepaid expenses are the advance payment of future expenses and are
recorded as assets when cash is paid. Become expenses overtime or
during normal operations. Examples: prepaid insurance, supplies, prepaid
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