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Revenues are an increase in SE
Epenses are a decrease in SE
When expenses exceed revenues, net loss occurs
Fiscal year a 12-month accounting period
Interim periods accounting periods of less than a year
The matching rule
Matching rule to measure the net income adequately, revenues and expenses must be assigned to the accounting period in which they occur regardless of when the cash is received or paid
Revenues and expenses are recorded in the periods in which they occur rather than in the periods in which they are received or paid.
The revenue and expense are recognized now even though they will be paid later
- Record revenues when earned
- Record expense when incurred
- Adjust accounts
So step one and two when contract is signed
Step 3 when payment takes place
This is important because of responsible spending?
Adjusting entries when transactions span more than one accounting period
Four situation s in which they must be made
Never affects cash account because with cash everything is set immediately
Always includes one balance sheet account and one income statement account
- Allocating recorded costs
You have an asset because you prepaidit for 2 months
Prepaid rent, asset increases = debit
Cash decreases = credit
When the month of renting expires the value of prepaid rent decreases by one month so half of the money decreases: per period
Rent expense on debit is money per period
Adjusting entry involves asset account and expense account
- Recognizing unrecorded expenses
Don’t pay every month but at one point you will have to pay everything
On the date of payment wages payable is full money
Until there, per period you put in a part of the total amount
Adjusting entry involves expense account and liability account
- Allocating recorded, unearned revenues between periods
Paid in advancefor whole year but company has not delivered service yet
So is unearned revenues
Begin of period you receive all cash: cash up on debit, unearned revenues credit
Every period unearned revenues will get debited and revenues credit
You slowly start to earn the money you already received, transfer from unearned to earned
Adjusting entry involves liability account and revenue account
- Type 4
Service provided first, payment after
So you earn it after every part of the service but receive money at end
After every service record on account receivable (asset) on debit and service revenues on credit
The last wedding makes accounts receivable and revenues balanced
Adjusting entry involves asset account and revenue adccount
So to cancel accounts receivable at the end the total amount will be cash on dbit and accounts receivable on credit
Balance sheet
Type 1 and type 4 are on the asset side
Type 2 and type 3 on the liability side
Income statement
Type 1 and type 2 are expense
Type 3 and type 4 are revenue
Deferral is the postponement of the recognition of an expense (1) already paid or revenue received in advance (3). Payment recorded before adjusting entry
Accrual is the recognition of a revenue (2) or expense (4) that has arisen but not been recorded during the accounting period. Payment after adjusting entry
Closing entries are journal entries made at the end of an accounting period to
- Set the stage for the next accounting period
Clear revenue and expense accounts and dividends accounts of their balances to start over with a zero balance in new period
- Summarize a period’s revenues and expenses
Income summary account is a temporary account that summarizes all revenues and expenses for the period. Never used in financial statements!! Its balance equals the net income or loss and is then transferred to Retained Earnings because it actually represents increases and decreases in SE àtemporary account, intermediate step
Permanent accounts are listed on the balance sheet and caary balance to next period
Temporary accounts are listed on income statement and reset after accounting period
Four steps in the closing process
- Closing revenue accounts
Debiting all revenue accounts (balance 0)
Transfer balance to credit side of Income Summary
- Closing expense accounts
Crediting all expense accounts (balance 0)
Transfer balance to debit side of income summary
- Closing the Income summary
Transfer balance to Retained Earnings
To credit or debit dependent on profit or loss
- Closing the dividends accounts
Crediting dividends (balance is 0)
Debiting retained earnings
àDetermine ending balance of retained earnings and transfer to balance sheet
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