Accounting Categories (Debit and Credit Balances) - Financial Accounting (FAC)
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Hanzehogeschool Groningen (Hanze)
International Business and Management Studies
FAC2
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Adjusting the Accounts
Chapter Number Chapter 3
📖 Table of Contents
Outline
3.1 Accrual-Basis Accounting and Adjusting Entries
Recognizing Revenues and Expenses
Revenue Recognition Principle
Expense Recognition Principle
Types of Adjusting Entries
3.2 Adjusting Entries for Deferrals
Prepaid Expenses (A)
Adjustment for Supplies
Adjustment for Insurance
Adjustment for Depreciation
Unearned Revenues (L)
Service revenue accounts after adjustment
3.3 Adjusting Entries for Accruals
Accrued Revenues (A)
Adjustment for accrued revenue
Accrued Expenses (Current Liability)
Accrued Interest
Accrued Salaries and Wages
Adjusting the Accounts 1
, 3.1 Accrual-Basis Accounting and
Adjusting Entries
Under the accrual basis, companies record transactions that change a company’s
financial statements in the periods in which the events occur.
For example, using the accrual basis to determine net income means companies
recognize revenues when they perform services (rather than when they receive
cash). It also means recognizing expenses when incurred (rather than when paid).
Recognizing Revenues and Expenses
Revenue Recognition Principle
When a company agrees to perform a
service or sell a product to a customer, it has
a performance obligation. When the
company meets this performance obligation,
it recognizes revenue.
The revenue recognition principle
therefore requires that companies recognize
revenue in the accounting period in which
the performance obligation is satisfied.
Expense Recognition Principle
This practice of expense recognition is
referred to as the expense recognition
principle.
It requires that companies recognize
expenses in the period in which they make
efforts (consume assets or incur liabilities) to
generate revenue.
Types of Adjusting Entries
Adjusting the Accounts 2
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