Chapter 3: the adjusting process

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accounting period concept

requires that revenues and expenses be reported in the proper period. To determine the proper period, accountants use generally accepted accounting principles (GAAP).

accrual basis of accounting

revenues are reported in the income statement in the period in which they are earned. For example, revenue is reported when the services are provided to customers.

accrued expenses

are unrecorded expenses that have been incurred and for which cash has yet to be paid.

accrued revenues

are unrecorded revenues that have been earned and for which cash has yet to be received.

accumulated depreciation

The adjusting entry to record depreciation expense is similar to the adjusting entry for supplies used. The depreciation expense account is increased (debited) for the amount of depreciation. However, the fixed asset account is not decreased (credited). This is because both the original cost of fixed asset and the depreciation recorded since its purchase are normally reported on the balance sheet. Instead, an account entitle accumulated depreciation is increased (credited).

adjusted trial balance

After the adjusting entries have been posted, and adjusted trial balance is prepared. The adjusted trial balance verifies the equality of the total debit and credit balances before the financial statements are prepared.

adjusting entries

The journal entries that bring the accounts up to date at the end of the accounting period.

adjusting process

The analysis and updating of accounts at the end of the period before the financial statements are prepared.

book value of the asset (or net book value)

The difference between these two balances of $1750 (1800-50) is the cost of the office equipment that has not yet been depreciated.

cash basis of accounting

revenues and expenses are reported in the income statement in the period in which cash is received or paid.

contra account (of contra asset account)

accumulated depreciation account are call contra accounts. This is because accumulated depreciation accounts are deducted from their related fixed asset accounts on the balance sheet.

depreciate

All fixed assets, except land, lose their usefulness and, thus, are said to depreciate.

depreciation

As time passes, the equipment loses its ability to provide useful services.

depreciation expense

As a fixed asset depreciates while being used to generate revenue, a portion of its cost should be recorded as an expense.

fixed assets

or plant assets, are physical resources that are owned and used by a business and are permanent or have a log life.

matching concept (or matching principle)

is the accounting concept supporting reporting revenues and related expenses in the same period.

prepaid expenses

are the advance payment of FUTURE expenses and are recorded as assets when cash is paid.

revenue recognition concept

is the accounting concept supporting the type or reporting when cash may or may not be received from customers during this period.

unearned revenues

are the advance receipt of FUTURE revenues and are recorded as liabilities when cash is received.

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