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An in-depth explanation of the accounting principles and practices related to accrued and prepaid expenses and revenues. It covers the accrual basis of accounting, revenue recognition, and the proper accounting treatment for accrued and prepaid items. Detailed examples and step-by-step illustrations of how to journalize and post these types of adjusting entries to the general ledger. It also discusses special cases such as accounting for supplies, depreciation, and accrued/deferred revenue. This comprehensive coverage of adjustment entries would be highly valuable for students studying business accounting, financial reporting, and related topics.
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Slide
Slide
Reading Material
Slide
Overview of Accounting Process
Slide
Accrual-Basis Accounting
Transactions recorded in the periods in which the
events occur.
Revenues are recognized when earned, rather than
when cash is received.
Expenses are recognized when incurred, rather than
when paid.
Accrual- vs. Cash-Basis Accounting
SO 1 Explain the accrual basis of accounting.
Timing Issues
Slide
Revenue Recognition Principle
Recognizing Revenues and Expenses
SO 1 Explain the accrual basis of accounting.
Companies recognize
revenue in the accounting
period in which it is earned.
In a service enterprise,
revenue is considered to be
earned at the time the service
is performed.
Timing Issues
Slide
Expense Recognition Principle – (Matching Principle)
Recognizing Revenues and Expenses
SO 1 Explain the accrual basis of accounting.
Match expenses with
revenues in the period when
the company makes efforts to
generate those revenues.
“Let the expenses follow
the revenues.”
Timing Issues
Slide
Revenues - recorded in the period in which they are
earned.
Expenses - recognized in the period in which they
are incurred.
Adjustment entries - needed to ensure that the
revenue recognition and expense recognition are
followed.
SO 2 Explain the reasons for adjusting entries.
The basics of adjustment entries
Slide
Deferrals
Accruals
SO 3 Identify the major types of adjustment entries.
Types of adjustment entries
Slide
Accounting for Accrued Expense
Slide
Accounting for Accrued Expense
Slide
Accounting for Accrued Expense
20 X 0
Mar 31 Cash at bank 1 , 000
Jul 2 Cash at bank 1 , 000
Oct 4 Cash at bank 1 , 000
Dec 31 Accrued expense 1 , 000 Dec 31 Profit and Loss 4 , 000
4 , 000 4 , 000
20 X 1
Jan 1 Accrued expense 1 , 000
Rent Expense
Dec 31 Balance c/d 1 , 000 Dec 31 Rent expense 1 , 000
Jan 1
Rent expense
(accrual reversed) 1 , 000 Jan 1 Balance b/d 1 , 000
Accrued Expense
A credit balance brought down on
Accrued Rent account
Slide
Prepaid Expense
Rent
Business rates
Supplies
Prepaid expenses often occur in regard to:
Motor expense
Depreciation
If the business pay in this period for something which relates to the next
reporting period, we use the prepayment principle to transfer that expense
forward to the next period.
Accounting principle for Prepaid Expense
Type DR CR Description
Prepaid Expense Asset
(prepayment)
(Reduction
in) expense
Expense paid/recorded in
period, not incurred until
next period
Expense recorded Cash Payment
Slide
Accounting for Prepaid Expense
Slide
Accounting for Prepaid Expense
28/02/20X0 DR Insurance Expense £
CR Cash at bank £
31/08/20X0 DR Insurance Expense £
CR Cash at bank £
18/11/20X0 DR Insurance Expense £
CR Cash at bank £
31/12/20X0 DR Prepaid Expense £
CR Insurance Expense £
01/01/20X1 DR Insurance Expense £
CR Prepaid Expense £
Adjustment entry
for Prepaid
expense
Reversing entry
for the new period
31/12/20X0 DR Profit and Loss £
CR Insurance Expense £