MGAB01H3 Chapter : The Basics of Adjusting Entries
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MGAB01H3 Full Course Notes
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Under the accrual basis of accounting, adjusting entries are needed to ensure that the revenue recognition and matching principle are followed. Prepaid expenses expenses paid in cash and recorded as assets before they are used or consumed. Unearned revenues revenues received in cash and recorded as liabilities before they are earned. Accrued expenses expenses incurred buy not yet paid in cash or recorded. Amortization allocation of the cost of capital assets to expense over their useful lives. Accrued revenues revenues earned but not yet received in cash or recorded. Adjusting entries are used to record the portion of the prepayment that is for the expense incurred or the revenue earned in the current accounting period. If an adjustment is needed for prepayments, the asset and liability are overstated and the related expense and revenue are understated until the adjustments are made.