뒤로The Adjusting Process in Financial Accounting: Principles, Examples, and Applications
스터디 가이드 - 스마트 노트
자료에 맞춘 맞춤형 노트, 핵심 정의, 예시, 맥락을 확장해 제공합니다.
Chapter 3: The Adjusting Process
Time Period Concept
The time period concept assumes that a business’s activities can be divided into specific, short time segments (such as a month, quarter, or year) for which financial statements are prepared. This allows for periodic measurement of financial performance and position.
Revenue Recognition Principle
The revenue recognition principle determines when revenues should be recorded. It is applied in five steps:
Identify the contract with the customer
Identify the performance obligations in the contract
Determine the transaction price: The amount the entity expects to receive for transferring goods or services.
Allocate the transaction price to the performance obligations: If multiple obligations exist, allocate the price accordingly.
Recognize revenue when the obligation is satisfied
Matching Principle
The matching principle ensures that all expenses are recorded in the period in which they are incurred and matched with the revenues they help generate. This principle is essential for accurately calculating net income or net loss for a period.
Accrual Basis vs. Cash Basis Accounting
Accrual basis accounting records revenues and expenses when they are earned or incurred, regardless of when cash is exchanged. Cash basis accounting records revenues and expenses only when cash is received or paid.
Cash basis | Accrual basis |
|---|---|
Records expense when cash is paid | Records expense when incurred |
Records revenue when cash is received | Records revenue when earned |
Unadjusted Trial Balance
An unadjusted trial balance lists all revenues and expenses but may omit transactions that have occurred but not yet been recorded. Accrual accounting requires reviewing the unadjusted trial balance to determine if additional revenues or expenses need to be recorded.
Adjusting Entries
An adjusting entry is made at the end of the accounting period to record revenues in the period earned and expenses in the period incurred. Adjustments are necessary for accurate measurement of net income and the correct reporting of assets and liabilities.
Deferral adjustments: Cash is exchanged before revenue is earned or expense is incurred (e.g., prepaid expenses, unearned revenue).
Accrual adjustments: Revenue is earned or expense is incurred before cash is exchanged (e.g., accrued expenses, accrued revenues).
Deferred Expenses (Prepaid Expenses)
Deferred expenses are advance payments for future expenses. They are not recognized as expenses at the time of payment but are deferred until used up.
After posting the adjusting entry, the Supplies account reflects the correct balance, and the Supplies Expense is reported for the period in which the supplies were used, following the matching principle.
Depreciation of Plant Assets
Property, plant, and equipment are long-lived tangible assets used in business operations. Depreciation is the process of allocating the cost of these assets over their useful lives, except for land, which is not depreciated.
Depreciation expense: The periodic allocation of a plant asset’s cost to expense.
Accumulated depreciation: The total depreciation recorded for an asset to date; it is a contra asset account.
Book value: The asset’s cost minus accumulated depreciation.
The straight-line method is commonly used to calculate depreciation:
Deferred Revenue (Unearned Revenue)
Deferred revenue is a liability created when cash is received before services are performed or goods delivered. As the service is performed, revenue is recognized, and the liability is reduced.
Accrued Expenses
Accrued expenses are expenses that have been incurred but not yet paid. Examples include salaries and interest expense. These create accrued liabilities.
Accrued Revenues
Accrued revenues are revenues that have been earned but not yet collected in cash. These are recorded as receivables until cash is received.
Adjusted Trial Balance
An adjusted trial balance lists all accounts and their balances after adjusting entries have been made. It ensures that total debits equal total credits and that all revenues and expenses are properly recorded for the period.
Summary Table: Cash Basis vs. Accrual Basis for Revenue
Cash basis | Accrual basis |
|---|---|
Records revenue when cash is received | Records revenue when earned |
Key Terms and Formulas
Depreciation Expense:
Interest Expense:
Book Value:
Example: If a company purchases equipment for $18,000 with a residual value of $0 and a useful life of 5 years, the annual depreciation expense using the straight-line method is $3,600 per year.
Additional info: The adjusting process is essential for ensuring that financial statements reflect the true financial position and performance of a business by adhering to the accrual basis of accounting and the matching principle.
