BU127 Chapter Notes - Chapter 4: Financial Statement, Accounting Information System, Debits And Credits
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BU127 Full Course Notes
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Revenues must be recorded when earned, and expenses must be recorded when incurred, regardless of when cash is received or paid. The accounting cycle is the process used by entities to analyze and record transactions, adjust the records at the end of the period, prepare financial statements, and prepare the records for the next cycle. Adjusting entries are entries necessary at the end of the accounting period to identify and record all revenues and expenses of that period. If adjustments are omitted, the reported amounts for assets, liabilities, equity, revenues, expenses, and net earnings will be incorrect and the related ratios are likely to be misleading. Companies wait until the end of the accounting period to adjust their accounts because adjusting the records daily would be very costly and time-consuming. Adjusting entries are required every time a company wants to prepare financial statements for external use.