Business Administration 2257 Chapter Notes -Accrual, Deferred Income, Debits And Credits
Course CodeBusiness Administration 2257
This preview shows half of the first page. to view the full 2 pages of the document.
CHAPTER 4 – ADJUSTMENTS, FINANCIAL STATEMENTS, AND THE
QUALITY OF EARNINGS
VAN HOUTTE, INC.
Any contra account is directly related to another account but has a balance on the
opposite side of the T-account.
Recognizing Revenues in the Proper Period
When cash is received PRIOR to earning a revenue by delivering goods/performing a
service, the company records a journal entry.
Unearned revenue is considered a deferred revenue account.
Accrued revenues: When revenues are earned but not yet recorded at the end of the
accounting period because cash changes hands AFTER the service is performed/goods
Recognizing Expenses in the Proper Period
Deferred expenses: When cash is paid prior to incurring an expense. Company debits
asset account and credits Cash.
Accrued expenses: Expenses that are incurred in the current period but not paid for until
the next. A/P.
When calculating adjusting entries…
1. Identify whether the adjustment is to an existing deferred revenue or expense
or an unrecorded accrued revenue or expense. Ask yourself “Was cash
already received or paid prior to the end of the period, or will cash be received
or paid in the future?”. If a deferred account is to be adjusted, write the
journal entry that was made when the cash was received or paid.
2. Draw a timeline to visualize events related to the amount of revenue earned or
expense incurred in the accounting period.
3. Record the adjusting journal entry.
AJE = Adjusting Journal Entry
Depreciation/amortization is simply a cost allocation concept, not a way of reporting a
reduction in market value.
Materiality: Suggests that minor items that would not influence the decisions of financial
statement users are to be treated in the easiest and most convenient manner.
You're Reading a Preview
Unlock to view full version