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Chapter 3

MGT 11A Chapter Notes - Chapter 3: Trial Balance, Accrued Interest, Retained Earnings

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Ch. 3
The Accounting Period
- Time period assumption
- Assues that a usiess’s ativities e divided ito tie peiods, like oths,
quarters, intervals, yrs etc
- Annual Financial Statements = reports covering 1-yr period
- Interim Financial Statements = reports covering 1/3/6 months of activity
Accrual basis accounting
- Uses an adjusting process to recognize revenues when earned & expenses when
incurred, are matched with revenues
Cash basis accounting
- Recognizes revenues when cash is received, records expenses when cash is paid.
Recognizing Revenues and Expenses
- Expense recognition (matching) principle
- Aims to record expenses in same accounting period as revenues earned as result
of expenses
- Is big part of adjusting process
Adjusting accounts
- Is 3-step process
- Determine what current account balance equals
- Determine what the current account balance should equal
- Record an adjusting entry to get from step 1 -> 2.
- Framework for adjustments
- Are necessary for transactions/events extending over more than 1 period.
- Group the adjustments by timing of cash receipt/cash payment in relation to
recognition of related revenues/expenses
- Adjusting entries
- Are made at end of accounting period to reflect transaction/event that is not yet
- Each entry affects 1 or more income statement and one or more balance sheet
accounts (but never cash account)
Prepaid expenses
- Are the items paid for in advance of receiving their benefits
- Are assets
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