Going Concern Concept Corporations are established for an indefinite - PowerPoint PPT Presentation

Going Concern Concept Corporations are established for an indefinite Period of time.

Time Period Assumption We divide the economic life of the corporation into artificial time periods

Time Periods Fiscal year – an accounting period which is one year in length. Can be a calendar year or any twelve month period.

Time Periods Interim Periods – any time period less than one year in duration. Quarter – four months Month

Accrual Basis Accounting Economic Transactions are recorded in the period inn which the events occur.

Cash Basis Accounting Revenue is recorded when cash is received. Expenses are recorded when money is spent.

Accrual vs. Cash Basis Accounting Accrual Basis accounting follows generally accepted accounting principles (GAAP) Cash Basis accounting does not follow generally accepted accounting principles (GAAP)

Revenue Recognition Principle Revenue is recognized when the services are performed or the merchandise (goods) are shipped – regardless as to when payment is received.

Expense Recognition Principle Expenses are recognized when the service is received or when we take possession of the merchandise (goods) – regardless as to whether we pay for them now or later.

Matching Principle All the revenue earned in a given time period must be recorded in that time period AND all the expenses necessary to generate that revenue must be recorded in that same time period.

Adjusting Entries Adjusting entries are required to ensure that the Matching Rule is being followed.

Adjusting Entries Adjusting entries are required every time a company prepares financial statements.

Types of Adjusting Entries

Accruals The transactions have been recorded in the time period, but the value must be adjusted do that the balance reflects the proper or actual value of the account at that point in time.

Deferrals The value of the revenue earned or expense incurred is not recorded in the time period so must be brought into that time period.

The starting point for adjustments

Deferrals Deferrals are either prepaid expenses or unearned revenues

Supplies

Insurance

Depreciation Depreciation is the allocation of the cost of an asset over a period of time. That period of time is called its useful life.

Depreciation Asset Cost $250,000 Salvage Value 50,000 Depreciable Cost 200,000 Divided by the useful life 10 years Equals annual depreciation expense of $20,000

Adjustment to record Depreciation Expense Debit Credit Depreciation Expense 20,000 Accumulated Depreciation - Equipment 20,000

Unearned Revenues

To Adjust Unearned Revenues

Adjusting for accrued revenues

Adjusting for Accrued Revenues

Adjusting for Accrued Expenses

Adjusting for Accrued Interest

Adjusting for Accrued Salaries

Journalizing the adjusting entries

Posting the Adjusting Entries

The Adjusted Trial Balance

Income and Statement of Retained Earnings

Balance Sheet