ADM 1340 Lecture Notes - Lecture 4: Trial Balance, Accrual, Convenience Store
3 May 2018
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Chapter 4
Study Objectives
• SO 1: explain when revenues and expenses are recognized and how this forms the basis
for accrual accounting
• SO 2: describe the types of adjusting entries and prepare adjusting entries for
prepayments
• SO 3: prepare adjusting entires for accruals
• SO 4: Prepare an adjusted trial balance
• SO 5: prepare closing entries and a post-closing trial balance
Timing Issues
• Companies need immediate feedback on how well they are doing
• Accounting into artificial time periods
o Month, quarter (three months), year
▪ One-year period is known as the fiscal year
▪ Shorter periods are known as interim periods
o Many transactions affect more than one time period
Revenue Recognition
• Revenue is earned (recognized) when:
o Sales or performance efforts is substantially complete
o Amount is determinable (measurable)
o Collection is reasonably assured
• In a merchandising company
o when merchandise is sold (point of sale)
• In a service company
o When the service is performed
Question
• How might revenue be recognized for a construction company?
• Compare this to how revenue might be recorded for a small convenience store
Expense Recognition
• Expenses are recognized when
o Due to ordinary activity, a decrease in future economic benefits occurs
▪ A decrease in an asset or an increase in a liability
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o Can be measured reliably
• Tied to changes in assets and liabilities
• Often (but not always) coincides with revenue recognition
o Known as matching
Question
• Identify some expenses that can be easily matched to revenue and some that parent’s as
easily directly matched to the revenue they help produce
Accrual Basis Accounting
• Transactions affecting a company’s financial statements are recorded i the period the
vents occur, rather than when cash is received or paid
o Revenue is recorded when earned, rather than when cash is received
o Expenses are recorded when goods or services are consumed or used, rather than
when cash is paid
Cash Basis Accounting
• Revenue is recorded only when each is received
• Expenses are recorded only when cash is paid
• Can lead to misleading information for decision-making
o Revenue and expenses can be manipulated by timing the receipt and payment of
cash
o Can increase or decrease profit
Adjusting Entries
• Entries made to adjust or update accounts at the end of the accounting period
• Required because the trail balance may not contain complete and up-to-date data
o Some items are not recorded daily
o Some costs are not recorded during the accounting period, as they expire due to
the passage time
o Some ties may be unrecorded
Types of Adjusting Entries
• Prepayments
o Prepaid expenses
o Unearned revenues
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find more resources at oneclass.com
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ADM 1340 Full Course Notes
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