COMMERCE 1AA3 Lecture Notes - Lecture 3: Deferral, Cash Advance, Faithful Representation
Document Summary
Adjustments and the conceptual framework: adjustments are end-of-year journal entries to update account balances, going-concern and periodicity dictate that financial statements be prepared periodically, faithful representation requires updating account balances. Why adjusting entries: accrual basis, not cash basis. With cash basis, there is no need for adjusting entries: timing differences between cash and performance, long-term assets. On march 1, 2013 a company pays ,000 for one year"s rent. By december 31, 2013, the firm would have occupied the property for 10 months. Also, there are only two months left in prepaid rent: Rent expense for 2013 = 1,000 x 10 = ,000. Prepaid rent as of 12/31/2013 = 1,000 x 2 = ,000. But so far, prepaid rent has a balance of ,000 and rent expense is not recorded yet. Timing differences between cash and performance give rise to the need for adjusting entries.
